When it comes to blemishes on your credit reports, all problems are not created equal. Certain types of derogatory items on your credit reports can stop a mortgage application in its tracks, regardless of your credit scores or your income. If you are preparing to apply for a new mortgage in the near future you should take a moment to check your credit reports for errors and also to see if any of the following potential “loan killers” are present.
Unpaid tax liens, both of the federal and the state variety, are very likely to cause you problems when you fill out a new mortgage application. Of course there are a few exceptions to this rule generally provided that you can show a history of on time payments on the lien and can still qualify financially for the new mortgage payment in addition to the payments on your lien. However, these instances are the exception and not the rule.
The reason why mortgage lenders care so much about the existence of an unpaid tax lien on your credit reports is because the lien could very likely put the lender in second position to get paid when and if your home is eventually sold to a third party. Mortgage lenders naturally want to be paid in first position upon any future sale of your property so that they can be sure to recuperate the funds initially loaned. Since an outstanding tax lien would generally push a mortgage lender out of that first position payment slot, you may be turned down for any new mortgage applications until your tax lien has been settled, paid and released.
Generally a mortgage lender will require you to pay off any outstanding judgments either prior to or at closing before agreeing to issue you a new home loan. In some cases a lender will still approve your mortgage application if you enter into a payment agreement to resolve the judgment and can prove that you have made at least six consecutive payments on the debt. Naturally any payments or wage garnishments will be factored into your debt to income ratio (DTI) calculations and will limit your buying power accordingly.
The idea that you can never qualify for a new mortgage loan as long as a bankruptcy is present on your credit reports is a myth. If you have ever filed for bankruptcy then this is good news since most bankruptcies will hang around on your credit reports for around a decade. However, it is true that a bankruptcy may put your borrowing ability on hold, at least for a while.
Depending on the type of mortgage loan you are applying for and the type of bankruptcy filed, your lender may require that a certain period of time has passed since the bankruptcy before you would be considered eligible for a new mortgage loan. This required cooling off time frame is referred to as a “mandatory waiting period.” Waiting periods vary, but for loans backed by FHA (Federal Housing Administration), Fannie Mae, or Freddie Mac the waiting period in generally around 2 – 4 years.
Foreclosures and Other Issues
Just like the bankruptcy issue above, foreclosures and similar foreclosure-like issues can prevent you from qualifying for a new mortgage for a time due to mandatory waiting periods. If you have a foreclosure, a pre-foreclosure, a deed in lieu of foreclosure, or a short sale on your credit reports you will also likely have to endure a cooling off period before another lender will approve you for a new mortgage. Depending on your specific circumstances and the type of loan for which you apply the waiting period can vary. However, similar to post bankruptcy qualification rules, the mandatory waiting period for foreclosures and foreclosure-like issues is typically 2-4 years as well.