- Your creditors notify the credit reporting agencies every time you miss a regularly scheduled payment by more than 30 days. Additionally, other businesses and service providers can notify credit agencies about unpaid bills and debts. These events significantly impact your credit score. Most lenders do not allow people with credit scores below 640 to take out mortgages, and even the Federal Housing Administration, which insures loans for people with low credit scores, requires borrowers to have scores in excess of 580. Late payments and unpaid debts may disqualify you from qualifying for a loan based on your credit score.
- When you apply for a mortgage, you must provide the lender with documentation to prove that you can afford to make the proposed monthly payments. Typically, your monthly debt payments cannot exceed 41 percent of your pre-tax monthly income. If you are in credit counseling because you are disorganized and cannot manage your finances well, then you may have sufficient income to qualify for a loan. However, most people in credit counseling do not have enough income to meet their current obligations, and cannot qualify for new loans.
- Some lenders allow people with poor credit and low income to take out mortgages, but only to refinance existing loans. If you can no longer afford your mortgage payment due to an interest rate increase or loss of income, your lender can either foreclose or allow you to refinance with a workout loan. Lenders have to pay legal fees to foreclose on homes, and in many cases have to sell property for below market value. Many lenders prefer to negotiate workout loans -- which involve principal or interest rate reductions -- to let homeowners stay in their houses.
- Reverse mortgages are loans designed for people over the age of 62 who want to turn equity in their homes into an income stream. Reverse mortgages are complicated arrangements, and in many instances, borrowers have to pay hefty fees to take out the loans. To ensure that borrowers understand the mortgage contract, the federal government requires people taking out federally insured reverse mortgages to meet with credit counselors as part of the application process. Therefore, reverse mortgages are one type of mortgage in which borrowers are compelled to attend credit counseling.