If you have a bad credit history, but have since improved things for yourself, you may wonder if your bad credit history will still affect your chances to get a mortgage. Unfortunately, the ‘bad stuff’ never goes away. It will always be a part of your history for potential lenders to see should they decide to look. How long will that bad history affect your chances of getting a loan?
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Keep reading to find out more.
How Far Back do Lenders Go?
Generally speaking, lenders go back as far as 12 months to look at your credit history. They are most focused on what you did in the last year. Does this mean that they won’t ever look back further than 12 months? It depends on the lender and the situation.
If you give the lender a reason to look back past 12 months, they might. If you have a spotty credit history now that puts you on the cusp of approval and denial, a lender may go back more than 12 months to see what your credit was like before then. They want to know if you have a repeat pattern of having bad credit or if this is a one-time thing.
Bankruptcy and Foreclosure are an Exception
If you have a bankruptcy or foreclosure on your credit report, this could affect how far back a lender looks at your credit history. These negative credit events have specific waiting periods or time you must wait to get a mortgage.
Typically, you must wait at least two years after a Chapter 7 bankruptcy to get a mortgage. Lenders will need to see when your bankruptcy was discharged so that they can determine if you are eligible for a loan yet. The same is true for a foreclosure. You may have to wait as long as three years after a foreclosure to get a loan, which will make lenders look back even further at your credit history.
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Other Things Lenders Look at on Your Credit Report
There are a few other things that might make a lender look back further than 12 months on your credit report:
- Do you have a lot of outstanding credit card debt? Your lender may want to see when this influx of credit card debt began. Has it always been the case or did you just charge up your credit cards recently? If you recently charged them, your lender may want an expiation as to what happened to cause the excessive spending to see if it’s something that might affect their loan approval.
- Do you have a lot of late payments? Again, lenders want to see a pattern. If you made payments late recently, was it something new or have you always done this? Lenders need to see why you make these payments late. Is it something that could affect their loan? If so, it could affect your approval.
- Do you have a lot of inquiries? Lenders also want to know what other loans you have applied for recently and in the past. Inquiries stay on your credit report for two years. Some lenders want to know what you applied for during that time so that they can determine if there’s any other debt out there that isn’t on your credit report.
Writing a Letter of Explanation
It may not be a bad idea to have a letter of explanation written for any negative information on your credit report within the last two years. Typically, lenders won’t go back much more than two years just because so much could have changed between now and then.
Look at the last two years, though, gives lenders a good indication of your level of financial responsibility. If you know you had a foreclosure, bankruptcy, late payments, or excessive debt during any point in the last two years, it could help to hear the reason from you. Writing down the reasons and providing any proof that you have to back up your claims could help your chances of approval.
Basically, lenders look at the last 12 – 24 months when looking at your credit history. If you have anything negative within that time, be ready to explain it. This doesn’t mean it will prevent you from getting a loan, but it could play a role in the decision that the lender makes.