Credit Score Limbo: How Low Can You Go When Buying a Home?

Applying for a home loan with a low credit score can feel like playing a game of limbo.  Having a mortgage application denied can feel like being in limbo. 

Borrowers that do not initially qualify for a mortgage due to their credit score can shorten the time they are in credit-rebuilding-limbo with a few simple steps.  Although, it might be helpful to first understand how credit scores are used when buying a home.

Lenders pull a tri-merge credit report from all three bureaus for each potential borrower.  All lenders use the middle score, which for many lenders needs to be no less than 640 in order to qualify a borrower for a mortgage.  

If the applicant’s score does not meet the cut off, the lender will then try to determine the cause of the low credit score.  Collections and judgments are common causes of low credit scores, and must be paid before the mortgage application can be approved. 

Medical collections are different.  Medical debt that collectively adds up to less than $1,000 does not have to be paid off in order to be approved for a mortgage, so long as that debt does not affect the credit score.  Lenders will vary on this rule.  You should ask your lender about medical collections before you do anything with them.

Some creditors will take longer to update paid debts than they do to turn over the debt to collections in the first place.   In this instance, the lender can use written proof that the debt has been paid.  The document must show all the account information, borrower name, and company letterhead.  For the revolving debt, or credit card accounts, the credit bureaus like to see you utilize your revolving credit, but not too much.  It is suggested that the balance remain under 40% of the credit limit to ensure the outstanding debt can be handled and paid timely.  As always, if you remit more than the minimum payment, it is looked upon in a positive manner to show the bureaus continue credit worthiness.

Completing this step is sometimes all it takes to increase a borrower’s credit score that fell just below the cut off.  If a borrower’s credit score is too far below 640, than they may be in credit-rebuilding-limbo for a while. There are still additional ways to speed up the process.

Potential borrowers can gather up documents that show they have been regularly paying their debts, and overnight them with return receipt requests to each of the credit bureaus.  The credit bureaus will then research and update the borrower’s credit score. This usually occurs within a few months.  

Lastly, borrowers may not have to pay off all of their debt in order to qualify for a mortgage. There is a calculation system, available to some most lenders, which allows them to see how credit scores would be affected if the borrower paid off a percentage or the balance of their debt.  Although it is not a certainty, it typically helps borrowers know where they need to be in order to take out a mortgage. 

As the potential borrower pays off their debt and gathers documentation, it is always good to stay in contact with the mortgage loan officer and/or the person that is assisting you in repairing your credit.

If you have any additional questions about how credit scores affect the home buying process, please call Stuart directly at 410.491.0200 or email at septstein@baybankmd.com.

A Client Shares His Experience With the Stuart Epstein Team

My experience with Carrollton Bank regarding my mortgage was more than just professional; it was exceptional. I have worked with larger financial institutions in the past with mortgage products, and you feel like a number in a queue rarely speaking with the same person twice. I even had a lender tried to rip me off. My experience with Stuart, Jen and Robert could not have been more different.

I was to close on my house by the end of June, and things fell through with the lender I was working with over a paperwork discrepancy. In a near panic that resulted in coffee being spilled on several of my documents when I arrived on their doorstep, Stuart and Jen took me in, and calmed me down. I explained the situation, and they assured me that things were doable. There may have even been ice cream cake, although I am not sure if that was for all new customers or if I was just at the right place at the right time! Once I was under their care things moved quickly, and they did what was needed to get the loan through under a very tight schedule in a very busy time period.

I cannot thank them enough for what they were able to do for me and in the time frame in which they did it. My new house was only possible because of their team, and I will certainly work with them in the future.

Thanks guys!
Matt Folley

One of Stuart Epstein's Fans Tells Her Success Story

Ordinarily, waiting at the MVA would be a frustrating affair. Today however, is different. I am content! I realize they are calling for G62; my ticket says G105, but I'm beaming. This is the day I change my license to my new permanent address, my first house.

Six months ago I would have told you that I was not ready for the commitment of buying a home. Or that I couldn't afford a mortgage, student loans, and a healthy social life. However, last September I attended a course presented by LiveBaltimore where I learned about the various incentives available to home-buyers in Baltimore City.

In October I approached Stuart Epstein and the Carrollton Bank team (Bob Foster and Jennifer Grosholz) with a challenge. Through my research and Stuart's assistance I hoped to earn $47,000 worth of grants, incentives, and principal diminishing loans to assist in the purchase of a new home. I also needed to close before December 1.

Stuart was excited by the challenge and the complexity of the paperwork involved; nor did it deter Bob or Jennifer who were extremely well organized, focused and served as an excellent resource.

Stuart and his team accomplished a miraculous feat by processing grants and loans from several different entities. They placed a rush on the inspection and kept me focused as the December 1 deadline rapidly approached.

It is with significant evidence of their hard work that I recommend Stuart Epstein and his team to you. Stuart is incredibly informed and up to date on all of the programs and incentives offered by the City of Baltimore, and even more so after working with me. They are responsive, professional, and personalize each service to the client.  I would not hesitate in working with them again and highly recommend their service.

I realize, still waiting for my number to be called at the MVA, that this would never have been my city, my home, without their support and hard work.

Thank you Stuart, Bob, and Jennifer!

- Charlotte Jones RN, BSN