Can You Buy a House With Charge Offs? A Guide for Homebuyers

Buying a house is an exciting milestone in life. However, having charge offs on your credit report can throw a wrench in your homebuying plans. As a homebuyer, it’s important to understand what charge offs are, how they impact your credit, and what you can do to still buy a house if you have charge offs.

What is a Charge Off?

A charge off occurs when you fail to make payments on a debt for an extended period, usually over 150 days past the due date. At that point, the creditor writes off the debt as a loss, closing the account. The debt still exists, you still owe the money, but the creditor no longer expects payment.

Charge offs severely damage your credit score. They remain on your credit report for seven years from the date of first delinquency. Even after being paid, a charge off continues affecting your score.

Common charge off accounts include credit cards, personal loans, medical debt, utilities, cell phone contracts, and others Mortgages can also be charged off when foreclosed.

How Charge Offs Affect Your Mortgage Application

Lenders view charge offs as a sign you are a high credit risk Multiple charge offs indicate a pattern of not paying debts, raising doubts about your ability to repay a mortgage.

Specifically, charge offs hurt your mortgage application in three ways:

• Lower credit score – Charge offs can drop your credit score significantly, even over 100 points. The lower your score the higher your mortgage rate and the harder qualifying becomes.

• Questionable history – Lenders scrutinize charge offs to understand why you stopped paying. Repeated or unexplained charge offs are concerning.

• Debt-to-income ratio – Lenders may include monthly payments for unpaid charge off debts when calculating your DTI ratio. A higher DTI makes qualification difficult.

While one or two small charge offs may be understandable, multiple, large, or recent charge offs can seriously jeopardize mortgage approval.

Can You Buy a House With Charge Offs?

The good news is you can still buy a house with charge offs on your credit report. While challenging, it is possible if you take the right steps.

Each mortgage lender has their own charge off policies, but here are some common guidelines:

• Conventional loans – Allowed up to $5,000 in charge offs for primary home purchase. Investment properties cannot have any charge offs.

• FHA loans – Permits charge offs with explanation. Manually underwritten loans scrutinize further.

• VA loans – Generally allow charge offs with minimal impact.

• USDA loans – Permits charge offs under $1,000 if credit score above 640. Manually underwritten loans need explanation.

• Jumbo loans – Have no standard policy, each lender sets own rules. Most limit amount allowed.

While permitted, charge offs raise scrutiny and make approval more difficult. You increase your chances by taking proactive steps:

• Pay off charge off accounts if possible. This directly improves your credit report.

• Build savings for a larger down payment. More equity offsets credit risk.

• Rebuild your credit. Raise your score by paying bills on time and lowering debt.

• Explain charge off circumstances to your lender. Convince them it was a one-time event.

• Provide recent history of on-time payments. This helps offset past issues.

• Apply with a lender specializing in second chance mortgages if you have multiple charge offs.

The bottom line is charge offs make getting a mortgage tougher but not necessarily impossible. With prudent steps to improve your credit and down payment funds, you can still achieve homeownership. Be prepared for a thorough review and possible roadblocks, but persist and you can buy a house even with charge offs haunting your credit history.