Getting Pre-Approved Before Shopping For A Home

In this article, we will cover and discuss getting pre-approved before shopping for a home. No two homebuyers have the same credit score and financial profile. You have first-time homebuyers with great credit, bad credit, no credit, prior bankruptcy and/or foreclosure, late payments, high debt-to-income ratio, collections, and charge offs. Because not everyone knows where they stand in qualified and pre-approved for a home loan, it is important getting pre-approved before shopping for a home. Most sellers will not show a home unless the prospective buyer does not have a solid pre-approval letter or is getting pre-approved before shopping for a home.

Should I Get Pre-Approved Before House Shopping?

Getting pre-approved before shopping for a home does not take long nor does it cost any money. In the following paragraphs of this guide on getting pre-approved before shopping for a home, we will walk you through the proper steps in getting pre-approved before shopping for a home. We will explain shopping for a house, and entering the home purchase contract. We will walk you through the overall mortgage process leading to a clear to close and the final home closing. By the time you are done reading this guide on getting pre-approved before shopping for a home, you will realize that the most important step of the mortgage process is the pre-approval stage and the reason why.

Can You Make an Offer Without A Pre-Approval Letter?

It is up to the home seller to decide whether or not to accept a home purchase offer from a home buyer without a pre-approval letter. Most real estate agents from both the buyer and seller’s side will not show home to home shoppers without a pre-approval letter. The right way to present a home purchase offer is getting pre-approved before shopping for a home. A solid pre-approval letter shows strength and home sellers will take you seriously on your real estate home purchase offer. We will go over later in this guide the importance of a solid pre-approval letter.

Can I Get Pre-Approved For Mortgage With Bad Credit?

There are times when consumers go through hard financial times and get behind on their credit obligations. One of the most common questions I get from my viewers daily is can I qualify for FHA Loans With Collection Accounts that have outstanding balances without having to pay them. FHA does not require the borrower to pay off outstanding unpaid collection accounts and balances to qualify for FHA loans. Many borrowers are told that they need to pay outstanding collection accounts and charge-offs in order to qualify for FHA loans. This is not HUD Guidelines on Collection Accounts but is a lender overlay. Overlays are additional guidelines that the individual lender requires that are above and beyond HUD Guidelines on collections and charge-offs.

Does Pre-Approval Hurt Your Credit?

• Transunion
• Experian
• Equifax

Can I Get Pre-Approved For a Mortgage With Recent Late Payments?

Getting pre-approved before buying a home with bad credit is not an issue. Borrowers can qualify for FHA Loans With Collection Accounts and charge off accounts without having to pay them. However, most lenders do want to see timely payments by borrowers in the past 12 months. One late payment reported to the credit reporting agencies can drop a consumer’s credit scores significantly. Multiple derogatory and late payments can easily drop a consumer with a 740 FICO credit score into the 500 FICO category.

Can I Get Pre-Approved For a Home Loan With Collection Accounts?

When you fall behind on your payment with a creditor, the creditor will most often try to contact you for the first four to six months. If you do not pay or make a payment agreement, the creditor may charge off your debt or contract it with a collection agency. The collection agency will then aggressively try to collect on the debt. The collection agency will most likely try to collect on the debt owed and even offer you a settlement. However, if you do have no source of income or are unemployed, it is obvious that you will not be able to pay the debt. This holds true especially if you have a large number of delinquent debts with multiple collection agencies and creditors.

How Far In Advance Should I Get Pre-Approved For a House?

Most collection agencies will do an online background search on debtors who are delinquent on their debts. If they discover that a debtor is collectible and has assets, they will rigorously try to collect on the debt by using the consumer. They can get a judgment entered against the consumer and enforce the judgment through wage garnishment, bank levy, and placing liens on the consumer’s assets and property.

Will I Get Sued By Creditors on Unpaid Collection Accounts?

Unless the collection agency is confident that the consumer has assets or enough income, the chances are that they will not pursue suing the individual because it costs a lot of money in attorney and legal fees in suing an individual as well as time. A judgment is worthless to a creditor if the debtor has very limited income and no assets. A consumer who has a judgment but no assets are considered to be judgment proof whereas a debt collector cannot collect on a debtor’s debt due to the debtor being insolvent.

How Can I Boost My FICO Scores To Getting Best Rates

HUD does not require you to pay off collection accounts to qualify for FHA loans With Collection Accounts.  Unpaid collection accounts will have less and less of an impact as it ages even with an unpaid collection balance. It is not uncommon for a consumer with many unpaid older collection accounts with balances to have credit scores of over 700 FICO after a couple of years as long as they have re-established credit.

Does a Bankruptcy and Foreclosure Affect Mortgage Rates?

A prior bankruptcy, foreclosure, a deed in lieu of foreclosure, or a short sale does not affect the pricing of mortgage rates. Outstanding collections and charged-off accounts do not affect mortgage rates. The only thing that affects rates is credit scores, loan to value, type of property, and loan amount. A bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale can easily drop your credit scores by more than 100 points.

Can I Improve My Credit Scores After Bankruptcy To Qualify For A Mortgage?

However, as time passes, your credit scores will eventually go up.  To expedite higher credit scores, get new credit such as several secured credit cards or other credit accounts. Re-establishing your credit by adding new credit will negate your bad credit and boost your credit scores. There are many folks who have unpaid collection accounts, charge-offs, bad credit, bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale that have credit scores of over 700 FICO one year later. This is because they have added new credit and have been timely on them

What Is The Best Mortgage For First-Time Homebuyers

FHA loans are the most popular loan program for first-time homebuyers, borrowers with collections and charged-off accounts, homebuyers with high-debt-to-income ratios, and homebuyers with no credit scores. You can qualify for an FHA loan with collection accounts without having to pay them. With FHA loans, collection accounts do not have to be paid to obtain an FHA loan. FHA classifies collection accounts into two categories. Medical collections and non-medical collections.

Getting Pre-Approved With Medical Versus Non-Medical Collections

Getting pre-approved before shopping for a home with collection accounts is not a problem on government and conforming loans. Medical collections do not count and you can have medical collection accounts and FHA will disregard them. Non-medical collection accounts do not have to be paid. However, if the aggregate unpaid balance of all of your non-medical collection accounts is over $1,000, then the lender will take 5% of the unpaid collection account and calculate that amount as part of your debt to income calculation. For example, if you have a total of $5,000 in unpaid collection accounts from 7 different creditors, the mortgage underwriter will take 5% of the $5,000, or $250, as part of your monthly debt obligation in calculating your debt to income ratios. This holds true even though you are not making that payment

Can I Get Pre-Approved For a Mortgage With Charged-Off Account?

Home buyers have nothing to worry about getting pre-approve before shopping for a home with charge-off accounts. Charge-off accounts do not count and home buyers can qualify for an FHA loan with a charge-off account no matter how much the charge-off account balance is. Many consumers make the big mistake of contacting a dormant creditor and making a payment on the old collection account. Never do this because by paying an old dormant collection account, what you are doing is re-activating the derogatory credit item. The credit bureaus will report it as a brand new collection account and your creditor scores will drop significantly.

Do I Need To Pay Old Collection Accounts To Get Pre-Approved For a Mortgage?

Leave old collection accounts alone even though you have an unpaid credit balance on them.  Chances are if the collection account is old, you already passed the statute of limitations period and you are not liable for that debt. Derogatory credit items need to be removed by the credit bureaus 7 years after the date of last activity by federal law with the exception of bankruptcy. This remains on your credit report for a period of 10 years from the discharge date. Plus the collection account will start as a fresh collection account on your credit report and your statute of limitations period will re-start over again.

Why Do Some Lenders Require Collection Accounts to Be Paid?

Getting pre-approved before shopping for a home with collection accounts is no problem. FHA guidelines are minimum lending guidelines and mortgage lenders do not have to just go off minimum lending guidelines.  Mortgage lenders can impose their own lender overlays on their mortgage loan borrowers.  If you go to a mortgage lender and they tell you that you need to pay off old collection accounts, then you know that they have their own lender overlays.  If that is the case, give us a call at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are mortgage bankers with no lender overlays and just go off automated underwriting system findings.  You can also apply online for a fast pre-approval by clicking APPLY NOW and I will get alerted right away.

This blog on getting pre-approved before shopping for a home was written and published on June 24th, 2022