Excessive delinquency on your credit report is a major no-no when applying for a mortgage loan. Ideally, a bank wants all of its customers to have excellent credit. This is in no way realistic, so some delinquency won’t necessarily kill the deal. Whether or not delinquencies on your credit report affect mortgage approval depends on the level of delinquency.
TL;DR (Too Long; Didn't Read)
It is possible to still get a mortgage if you have delinquencies on your credit report. Lenders will ultimately consider at the type, time and level of delinquency, as well as your debt-to-income ratio, when they deny or approve your application.
How Banks Use Credit Reports
A bank runs your credit report for several reasons. First, it wants to see that you have a good history with your creditors. Next, it looks for bankruptcies, judgments, wage garnishments or other negative public records filed against you. Finally, it compares your monthly debt to your monthly income to calculate your debt-to-income ratio. The goal is to get a borrower with minimal delinquency, no attachments and a debt-to-income ratio of less than 43 percent.
Type of Delinquency
Banks are leery of borrowers with a significant history of non-payment. A few 30-day delinquencies will warrant a closer look. If those past-due payments are sporadic and don’t reveal a potential trend of delinquency, the bank won’t deny you at this point.
If, however, your debt-to-income ratio is at or slightly above the bank’s threshold, those delinquencies may be the deciding factor between approval or denial. Numerous 60- or 90-day past-due payments are a serious red flag. If you’ve reached that level of delinquency on a prior mortgage, it will be very difficult to get approved.
Time Since Delinquency
If you were late on a few car payments while you were in college five years ago, don’t give up just yet. If the bank sees that your recent payment history is good, and you have the income to support the loan, it will chalk that delinquency up to a rough patch you’ve gotten past. If, however, you have many recent delinquencies on multiple accounts, the bank will see you as a risk and likely deny your loan.
How to Help Your Chances
A mortgage approval is always going to be out of your hands, but you can at least give yourself a fighting chance. Obtain a copy of your credit report from the website annualcreditreport.com. Review the report for mistakes, and if you find data that doesn’t belong, contact the credit bureaus to get it removed before applying for your mortgage.
When you do apply, be upfront about your credit history. If you have multiple delinquencies related to a life-altering situation, put an explanation in writing. Detail how the delinquency happened, how you dealt with it, and why you’re in a better position now. If you’re on the cusp, it can be the push you need to get approved.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.