There are long-term effects of financial hardships which could impact your ability to 
prequalify for a home loan. You may have been laid off from your job. You could have been in an accident and not able to work for a short period of time. You might have gone through a divorce. No matter the cause of the financial hardship, it could have affected your ability to pay your credit cards, car loan, and other debts on time.
Any time you apply for a mortgage, potential lenders will review your credit history and credit score as part of their decision-making process. When you are late on debt payments to creditors, they often report this to the three major credit bureaus. Late payments lower your credit score significantly and could turn your good credit rating into a subprime score (below 620).
Even though your current history can show your payments are once again being made on time, any late payments and collections remain on your report for three years. Other types of hardships, like a vehicle repossession or prior home foreclosure, remain on there for seven years. If you filed bankruptcy to help alleviate your financial woes, it will remain on your credit report for ten years.
Fortunately, there are still things you can do to help offset your previous period of financial hardship and secure a mortgage. A good place to start is to determine exactly how much home you can afford. The last thing you want to do is overspend and find yourself in another financial struggle.
Most lenders use one of two different guidelines for determining this amount:
- The total of all monthly debts does not exceed 32 percent of your total monthly income; or
- The total monthly debts do not exceed more than 40 percent of your total monthly income.
The reason there are two different guidelines has to do with the different types of home loans, such as FHA loans, imperfect credit programs, adjustable rate programs, first time home buyer pre approval, and so on.
Obtain Copies of Your Credit Reports
You are entitled to receive free copies of your credits reports from all three major credit 
bureaus annually. It does not hurt to review your credit reports and see exactly what is on there. Sometimes there can be errors, like if you paid off a collection account, and it may still show open on the report.
In addition, it could be beneficial to look at when certain negative items are going to fall off your report. For instance, if you only have to wait a few months before your slow payment history or paid collections fall off, it is a good idea to do so, as, once these fall off, your credit score will go up.
Talk to a Chicago Mortgage Broker
The next thing you will want to do is talk to one of our mortgage brokers, here at A and N Mortgage. Our brokers understand the difficulties you can have when trying to prequalify for a mortgage and are able to answer your questions, as well as offer suggestions on what you can do to help improve the likelihood of being approved.
Determine How Much of a Down Payment You Require
Lenders will want to see you invest part of your money into the purchase of your new 
home in the form of a down payment. With poor credit situations, you may have to come up with a larger down payment amount, and it is not uncommon for some lenders to ask for 20 percent.
On other programs, like certain first-time buyers and FHA loans that still approve people who have had prior hardships, these often have smaller down payments, ranging from 3 to 10 percent, but could require carrying private mortgage insurance, which will increase your monthly mortgage payment.
Is It Okay to Wait?
Last, is it okay to wait if you are not able to prequalify or are not satisfied with the loan terms and conditions? While you are waiting, continue to pay your debt obligations on time and set aside a portion of your monthly income for your down payment.
Here at A and N Mortgage, we will work with you to help you find the best loan program available for your current credit and financial situation. If we are not able to find a program for you right now, we will explain to you what you need to do to be approved in the future.
To learn more about our loan programs you may prequalify for, even if you have had financial hardships in the past, please feel free to contact us at (773) 305-LOAN (773-305-5626) to speak with one of our mortgage brokers today!
