Derogatory Credit Items And Bad Credit Mortgage Guidelines

Qualifying for a Mortgage with Derogatory Credit Items in 2025

Having derogatory credit items on your credit report can feel overwhelming, especially when you’re ready to buy a home. The good news? Even with these credit hiccups, homeownership is still within your reach. At Gustan Cho Associates, we specialize in helping borrowers navigate around derogatory credit items to qualify for a mortgage.

In this guide, we’ll break down exactly what derogatory credit items are, how they affect your mortgage eligibility, and—most importantly—what you can do about them.

What Are Derogatory Credit Items?

Derogatory credit items are negative marks on your credit report that signal past financial problems. Common derogatory credit items include:

• Late payments
• Collections
• Charge-offs
• Bankruptcies
• Foreclosures
• Judgments
• Tax liens

It’s important to know how these items affect your credit score. They can also influence your chances of getting a mortgage.

How Derogatory Credit Items Impact Your Credit Score

Every derogatory credit item lowers your credit score. Late payments can quickly reduce your credit score by 50 to 100 points. In comparison, severe items like bankruptcy or foreclosure might drop your score by over 150 points. Derogatory credit items can remain on your credit report for several years:

• Late payments, collections, and charge-offs typically stay for 7 years.
• Chapter 7 bankruptcies stay for 10 years.
• Chapter 13 bankruptcies stay for 7 years.
• Foreclosures, short sales, and deeds-in-lieu remain for 7 years.
• Tax liens may stay on your credit report for up to 15 years.

Knowing how long these derogatory credit items last helps you plan effectively to rebuild your credit.

Charge-Offs: What You Need to Know

One common derogatory credit item is a “charge-off.” A charge-off occurs when creditors assume they won’t collect the debt. After around four months of missed payments, they mark the debt as a charge-off.

This doesn’t mean your debt disappears. Instead, it often gets sold to collection agencies. Unfortunately, this means the same debt might show up twice on your credit report: once as a charge-off and once as a collection account.

Charge-offs can significantly damage your credit score, but the good news is you can still qualify for a mortgage even if you have unpaid charge-offs. FHA and VA loans don’t require paying off these accounts to qualify.

Bankruptcy: Not the End of Your Mortgage Dreams

Bankruptcy is considered one of the most significant adverse entries on a credit report, but it doesn’t last forever. A Chapter 7 bankruptcy stays on your credit report for a decade, whereas a Chapter 13 bankruptcy is documented for seven years.

Even though there are challenges, getting a mortgage not long after bankruptcy is possible. With FHA and VA loans, there’s only a two-year waiting period after completing your Chapter 7 bankruptcy. If you are in a Chapter 13 repayment plan, you can apply for a mortgage after just one year, as long as you have made your payments on time and have approval from your trustee. This means that even if you have derogatory credit items from your past, options are available to help you repurchase a home.

At Gustan Cho Associates, we help clients rebuild their credit after bankruptcy. You can use secured credit cards and make on-time payments to raise your credit score to over 700 within a year.

Foreclosure: Moving Forward

Foreclosure is tough, but it doesn’t mean homeownership is off the table forever. A foreclosure usually lowers your credit score by over 100 points and remains on your report for seven years.

Here’s how quickly you can move forward:

• FHA requires a 3-year waiting period after foreclosure, short sale, or deed-in-lieu.
• VA loans have a shorter waiting period of only two years.
• Conventional loans require four years after short sales and seven years after foreclosures.

During this waiting period, focus on re-establishing your credit. Showing lenders you’ve learned from past issues and maintained good credit behavior can make you a strong mortgage candidate.

Tax Liens and Judgments

Tax liens and judgments are serious derogatory credit items that can hurt your credit score. When you have a tax lien, it means you owe money to the government. This tax lien can stay on your credit report for up to 15 years and cannot be erased if you file for bankruptcy. Paying off a tax lien can make you look better to lenders and improve your creditworthiness.

Judgments are another type of derogatory credit item. They usually stay on your credit report for seven years, but the effects can last longer. If someone wins a judgment against you, they might take money from your paycheck or freeze your bank accounts to get paid. Taking care of these issues is important to keep your credit in good shape.

Resolving judgments quickly is crucial. You can negotiate a settlement, pay in full, or sometimes get judgments vacated. At Gustan Cho Associates, we help borrowers strategize these issues to clear the way for mortgage approval.

Steps to Rebuild Your Credit

Recovering from derogatory credit items is entirely possible. Here are clear, actionable steps you can start today:

1. Check your credit reports regularly for accuracy. Dispute any errors you find immediately.
2. Pay your bills on time moving forward. Consistent timely payments greatly improve your credit.
3. Open secured credit cards. These require a small cash deposit but can dramatically boost your credit if managed well.
4. Keep credit balances low. Strive to maintain your balances under 30% of your credit limit.

By following these steps, you can improve your credit score over time. This will make it easier for you to qualify for a mortgage.

Mortgage Options with Derogatory Credit Items

At Gustan Cho Associates, we offer specialized loan programs to help borrowers overcome derogatory credit items:

• FHA loans: Ideal for borrowers with past credit challenges. The FHA requires only a 580 credit score for 3.5% down payment loans.
• VA loans: There is no official minimum credit score, but typically, a 580 score is recommended for easier approval.
• Non-QM loans: Designed for borrowers who don’t fit traditional loan guidelines due to recent derogatory credit items or unique income situations.

We proudly offer loans without additional “lender overlays,” meaning we don’t impose stricter rules beyond standard federal guidelines. This makes Gustan Cho Associates uniquely positioned to help borrowers with derogatory credit items qualify for home loans.

Real-Life Success Stories

Many people with bad credit have been able to repurchase homes, even after tough times. For example, Sarah lives in Illinois. She had a foreclosure and some charge-offs, but just three years later, she got an FHA loan to buy a house.

Mike from California filed for Chapter 7 bankruptcy, and his credit score went from 530 to 710 in just one year! He did this by using secured credit cards.

These stories show that owning a home is still possible even after facing derogatory credit items.

Ready to Get Approved?

Derogatory credit items don’t have to end your dream of owning a home. At Gustan Cho Associates, we offer personalized guidance to help you qualify for a mortgage despite past credit issues. Our experienced team allows borrowers nationwide every day.

Ready to explore your options? Contact us at Gustan Cho Associates by calling 800-900-8569, texting for a fast response, or emailing gcho@gustancho.com. Let’s create your success story today!

Frequently Asked Questions About Derogatory Credit Items:

Q: What are Derogatory Credit Items?

A: Derogatory credit items are negative marks, such as late payments, collections, bankruptcies, and foreclosures, that hurt your credit score.

Q: How Long do Derogatory Credit Items Stay on My Credit Report?

A: Most derogatory credit items last about 7 years, but some, like Chapter 7 bankruptcies, last 10 years, and tax liens can last up to 15 years.

Q: Can I Get a Mortgage Even if I have Derogatory Credit Items?

A: Yes, even with derogatory credit items, you can qualify for a mortgage, especially with FHA and VA loans.

Q: Do I Need to Pay Off Charge-Offs Before Getting a Mortgage?

A: You don’t have to pay off charge-offs to get approved for FHA or VA home loans.

Q: How Soon After Bankruptcy Can I Buy a Home?

A: You can get a mortgage just 2 years after a Chapter 7 bankruptcy discharge and as soon as 1 year into a Chapter 13 bankruptcy repayment plan.

Q: Does Foreclosure Mean I Can’t Repurchase a Home?

A: No, you can still buy a home. FHA loans require a 3-year waiting period, VA loans only need 2 years, and conventional loans have longer waiting periods.

Q: How can I Quickly Rebuild My Credit After Derogatory Credit Items?

A: You can rebuild your credit quickly by getting a secured credit card, paying on time, and keeping your balances low.

Q: Can Tax Liens Stop Me from Getting a Mortgage?

A: No, but paying off tax liens can greatly improve your chances of getting approved because they’re serious derogatory credit items.

Q: What’s the Fastest Way to Handle Judgments on My Credit Report?

A: The fastest ways are to negotiate with the creditor, pay off the judgment, or sometimes get it removed from your report entirely.

Q: Why Choose Gustan Cho Associates if I have Derogatory Credit Items?

A: Gustan Cho Associates assists borrowers with negative credit records in obtaining mortgages, even when other lenders decline their applications. We avoid imposing additional rules beyond the standard guidelines, simplifying the approval process.

This blog about “Derogatory Credit Items And Bad Credit Mortgage Guidelines” was updated on March 14th, 2025.