Which extenuating circumstances will affect your mortgage financing options?

• Hospital Bills
• School Loans
• Unemployment and delinquent credit card bills
• Judgment
• Spouse’s Bankruptcy

Situations beyond a person’s control can destroy their good credit rating. Lisa and Jack Mahoney were newlyweds in pursuit of a home loan. The largest flaw on their credit report was Jack’s bankruptcy. Without his knowledge, Jack’s previous wife racked up credit cards bills in his name. The debt sins of his previous marriage were affecting his ability to get credit for a new home.

Jack’s bankruptcy will remain on his credit report for 10 years. It will actually remain on his court records for 20 years. There are two types of bankruptcies, chapter 7 and chapter 13. A chapter 13 is for people with too much income. While a chapter 7 is for those who have a lot of non-dischargeable property. Chapter 13 bankruptcy is for consumers or small businesses who want to repay their creditors while protecting their real estate and personal property and avoiding harassing collections efforts.

The best way for Jack and Lisa to be approved for the lowest mortgage rate is with the exclusion of Jack’s credit history. Although hospital bills do not carry the same weight as a bankruptcy, medical bills can destroy credit. Mitchell and Denise Travestino owed $50,000 in medical bills. With their other financial commitments, they were squeezed. However, they had an option to buy the apartment that they rented.

On the contrary, failing to pay a hospital bill is not deemed as negligent as failing to make a mortgage or car payment. The best way for the Travestinos to maintain their credit rating would be debt consolidation.

Credit Grades

Generally, mortgage companies grade a loan based on certain credit related issues and circumstances, including:

• Payment history
• Income
• Amount of debt payments
• Employment stability
• Bankruptcies
• Equity position
• Credit score

Prerequisites for –A, B, C, D Credit Grades

If a want-to-be homeowner has filed bankruptcy, they can potentially qualify for a mortgage loan with the following requirements:

• Credit score range 670-660
• Debt ratio 28/38
• Zero delinquencies within the last 12 months years

For B+ to - B- credit and a credit score of 620 and above, mortgage approval is possible, if the following circumstances are not exceeded:

• 2-3 Delinquencies in the last 12 months
• Zero - 60-day late payments
• 24 -28 months since bankruptcy discharge
• Fifty percent debt ratio
• Maximum 75-85 percent LTV Ratio

With a credit score of 580 and a credit grade of C+ to C-, calculate whether you are mortgage-worthy. As long as you have the following:

• Debt ratio of 55 percent or less
• Maximum LTV – 75 percent
• Less than two 60-day late payments
• 12 - 24 months since bankrupt discharge
• High "rolling" lates are permissible

If your credit rating is D+ to D- with a credit level of 550 or better, mortgage approval is possible if the following are in order:

• Debt ratio – less than 60 percent
• Maximum LTV 65-55
• No more than five 60-day late payments in a 12 month period
• Bankruptcy discharge within last 12 months.
• Judgments to be paid w/ loan proceeds
• Not in foreclosure

The above extenuating circumstances are approximations regarding your credit financing-ability. Bear in mind the following fundamentals:

• If you have poor credit, all of the other aspects of your loan need to be in order. Stability, equity, documentation, income, and assets play a larger role in the approval decision.


• When assessing your grade, certain delinquency combinations are allowed; however, the worst case will lower your grade to a lower credit grade. (Late mortgage payments and bankruptcies are the most important.)


• Payment and credit patterns are essential. A high number of recent inquiries coalesced with more than a few outstanding loans may signal a problem. A "willingness to pay" is imperative. Late payments in the same time-period are better than random late payments as they signal an effort to pay even after falling behind.

Extenuating circumstances should not impede your mortgage financing capabilities. Consider ways to clean up or makeover your credit history. In most cases, the best cure for tainted credit is debt consolidation.