In his interview with HousingWire, Mel Watt, the director of Federal Housing Finance Agency urges the opening of the mortgage credit box to less-than-optimal borrowers.
"We are getting lenders to reduce some of the credit overlays," he said in the exclusive interview.
Furthermore, FICO scores will ignore debts that have been paid off or settled, and a lesser weight will be assigned to medical bill collections, which account for about half of all unpaid collections on consumers’ credit reports.
Nonetheless, the average FICOs have been going down steadily since 2006 and it’s not hard to see why, what with the housing crisis, the financial meltdown and the general recession and record unemployment and underemployment.
So what can those with a FICO that is under 620 do to get a mortgage?
1. Prepare to pay more
People with poor credit can still get a mortgage, but they will pay far more than even those with credit scores on the margin.
Guidelines from the U.S. Department of Housing and Urban Development and the GSEs, Fannie Mae and Freddie Mac, advise waiting at least two years after a short sale, so long as credit after the short sale is good.
Sellers should be advised to do their homework on the mortgage brokers they are working with – shady and dodgy operators are like bottom feeders, looking to prey on those who are more desperate and who aren’t financially savvy, which is how they see people with poor credit.
2. Refinance ASAP
A bad credit mortgage may seem like the borrower is signing away their life on a bad deal, but so long as the borrower maintains their credit after the mortgage is signed, they can be eligible to refinance for a much better deal within two years, and their credit will have improved.
In short, a bad credit mortgage is a short-term solution that gets them in a home. It's important to bear in mind that bad credit needn't follow the borrower longer than necessary.
3. Ask about options
The 30-year mortgage is a popular choice, but maybe not the right one if the borrower's credit is weak. Adjustable rate mortgages are also a possibility, depending on the circumstance, during which time the borrower can work on repairing and maintaining their credit while paying at a lower interest rate than are offered on fixed-rate mortgages.
Many people who had their credit torn up in the recession were not the typical bill skippers. They were hard-working, responsible people whose world was upended through layoffs, downsizing, the loss of contract work, and a dozen other legitimate reasons.
4. Get a co-signer
Many have some other assets, or have family members who are responsible. These people may be willing to co-sign. Federal Housing Administration rules allow for a co-signer on loans.
Above all, check with HUD, FHA, the FHFA, Fannie Mae and Freddie Mac for information on pathways to homeownership for those who have damaged credit.
It is possible to get a mortgage with bad credit today. Possible, but still challenging.