Home Loans and Derogatory Marks on Your Credit Report (2024)

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When it comes to credit reports, derogatory marks are a homeowner’s worst nightmare. A derogatory mark is a long-lasting negative account of debt that can affect your credit report for a multitude of years. This can stem from foreclosures, bankruptcies, or other late payments. If you are one of the many people affected by these marks, then buying a home in Arizona has most likely become a difficult process. Here’s a list of derogatory marks and how you can improve your credit report so you can potentially qualify for a home loan.

Types of Derogatory Marks

Bankruptcy

When it comes to highly impactful derogatory marks on your credit report, bankruptcy is ranked near the top. The most common form of personal bankruptcy is called Chapter 7 bankruptcy, also known as straight or liquidation bankruptcy that requires those in debt to surrender their property in exchange for their debts. That property is then sold for cash that will be used to pay back those that the owner took loans from.

• To get a home loan after Chapter 7 bankruptcy, you must wait two years (sometimes three) after the bankruptcy has been discharged (not from filing date).
• If you’re worried about your business, meet with a bankruptcy attorney that can help you if you are struggling with paying bills or facing repossession.

Chapter 11 bankruptcy is less common but also damaging to your credit report if not taken care of accordingly. This type of bankruptcy allows debtors to take out loans to pay off existing debts or cancel existing contacts. If the debts end up exceeding the owner’s assets, ownership rights are transferred to the creditors.

• This type of bankruptcy also requires 2-4 years of waiting before your credit report is repaired enough to qualify for a home loan.

Lastly, Chapter 13 bankruptcy, known as reorganization and wage earner’s bankruptcy, forces the owner to create a three to five year repayment plan. This gives them more time to extend their payment period and keep their assets longer than those going through Chapter 7 bankruptcy.

• After a full year of proving that you can make these payments, you may qualify for a home loan.
• You’re required to have record of the yearlong payments, a court trustee’s written approval, and your own detailed explanation of the bankruptcy attached to the loan application.

Charge-Offs

Another set of derogatory marks made on your credit report are charge-offs. These debts can’t be paid off because of three reasons. One being that a payment is past due, specifically 120 days for a loan or 180 days for a credit card. The other two reasons would be that the debt holder dies or that the debt holder goes bankrupt. Charged-off debts stay on your credit report for 7 years.

• Ask for the charge-off to be removed from your credit report if it is older than 7 years.
• Pay it off all at once, only full payments are marked on your credit report which is more appealing to lenders.
• Slowly work on repairing credit by paying bills and credit cards on time.

Foreclosures

For many homeowners, a foreclosure is the unfortunate result of not being able to keep up with mortgage payments. After the rights to your property are repossessed, your credit report will definitely show some derogatory marks. It’s difficult to apply for a mortgage after foreclosure when lenders see that you failed to keep up with your last one.

• You can apply for an FHA loan three years after the completion of your foreclosure. You may also have to provide personal explanations to your lender describing your past financial situation.

Public Records

Any information that can be accessed on public records can hurt your chances of getting a home loan. This includes unpaid child support, delinquent taxes, auto repossessions, and unpaid alimony.

• Depending on how long-term these payments are, they may or may not affect your ability to apply for a mortgage.
• Speaking directly with your loan officer is the best way to ensure your situation is understood as many lenders are used to dealing with clients that have these common derogatory marks.

Late Credit Card Payments

This is of course, one of the most worrying aspects for anyone looking to take out a loan for housing. However, missed credit card payments on a previously perfect record won’t hurt your chances at all. A pattern of missed payments or arrears will make repairing credit a much harder task and will most likely take a couple years to fix.

Read: Rent to Own Credit Repair: What it Means for Your Home-Buying Goals

The Road to Repairing Credit

Despite however many derogatory marks are on your credit report, there’s always a way to repair bad credit. Other than the obvious answer of saving up and paying debts off little by little, you should always make sure that your records are kept straight. Never pay for credit repair services or people that state they can remove or hide your debt. That could put you in an even more unstable financial position. You would find better luck negotiating with debt collectors to offer some payment instead of none at all. By developing a steady pattern of on-time payments, you can eventually leave your bad credit reports behind!

Read: Finding Home Down Payment Assistance in Arizona

Getting a Home Loan With Bad Credit

The key to getting a home loan despite bad credit is to have a lender that comprehends your unique set of circ*mstances and future plans. Go with a trusted AZ real estate company that works with other trusted lenders that are willing to work around your situation. CENTURY 21 Northwest Real Estate knows that everyone makes mistakes and deserves another shot at finding their dream home despite their derogatory marks.