Mortgages-Before You Apply, Check Yourself Out

You might have heard about the term "subprime mortgage." It's a term that people throw around to describe lenders who approve those with poor credit. Many people whose credit is less than perfect automatically resign themselves to applying with these subprime mortgage companies. They think it's the only way to be able to get a mortgage approval. Before doing so, however, you might want to think twice.

It's true that subprime borrowers typically are people with challenged credit. However, credit is not the only criterion to be classified as subprime. Although guidelines will vary by lender, you might be a subprime borrower if:

� You have a foreclosure on your credit report.

� You filed for bankruptcy, and it has not been two years since it's been discharged.

� You have excessive late payments (60 days to 120 days and up).

� You're enrolled in CCCS or an equivalent non-profit credit counseling service.

� Your income is primarily paid with cash or personal checks.

� You have very little equity in your home.

� You have a very high (above 40%) debt-to-income ratio.

� You are self-employed and have sporadic or difficult-to-verify income. � Your home values are extremely low (under $25,000). � Your credit score is below 620.

Notice that not every guideline is credit-related. A subprime borrower can have absolutely perfect credit, but if he or she works as a housekeeper that is paid with cash, it's quite possible that subprime guidelines would apply.

Even if your situation matches one of the above, there is always room for interpretation. For example, you might have discharged your Chapter 7 Bankruptcy two years ago. IF you have at least three accounts on your credit report that you've been paying perfectly for the two years since your discharge, you might qualify for a conventional mortgage. This is especially true if you've been paying your rent or mortgage on time, every time.

How can you avoid having to apply with a subprime mortgage company?

The very first step you MUST take is to obtain a copy of your credit report, along with your credit scores. Get a copy from each of the three major credit reporting bureaus: Equifax, Experian, and TransUnion. Each credit bureau maintains its own profile of your credit. They are completely independent of each other, and they do not share or swap information among themselves. You will therefore find that your three credit scores will be different.

Many mortgage companies, both subprime and conventional, will base their lending decision on the middle of your three credit scores. For example, your scores might be 588, 612, and 638. Your middle score is 612, as scored by TransUnion, for example. This is below the 620 score that many lenders use as a cutoff to qualify you for the preferred mortgage products. Now you might be wondering why you wouldn't meet that 620 guideline since one of your scores is 638. In this case, because 638 is your highest score, it is, in effect, disregarded.

Now that you know that you need to raise that 612 to at least 620, you can map out a strategy that focuses on your TransUnion credit report. Although you should try to fix all three credit reports concurrently, your TransUnion report will likely get you above 620 the fastest.

It's not as important to try to raise the 638 (although you should try anyway). Even if 638 skyrockets to 700, your middle score will still be 612.

Your individual situation will vary. Your middle credit score might be from any of the three credit reporting agencies, not just TransUnion, so keep that in mind.

Be aware that credit score is not the only thing you need to worry about. People have qualified for FHA mortgages with scores as low as 580. You must look at the entirety of your situation, including income, assets, equity, job stability, etc.

Just because you've had a late payment, a collection, or even a bankruptcy on your record, do not automatically assume that you're a subprime borrower. Also, don't rely on the mortgage company to tell you whether you're a subprime borrower. Know your own credit situation first. You might just find yourself qualifying for the very same mortgages as people with perfect credit.

Frank Bruno