January 12, 2017

Getting a mortgage with bad credit can be possible, but borrowers need to have the right expectations. The best loan option depends on the credit issue, when it happened, the borrower’s current income and assets, the property, the loan purpose, the down payment or equity position, and the available exit strategy.

Bad credit does not automatically mean a borrower cannot get a mortgage. It does mean the borrower needs to understand which loan programs may be realistic and which programs are likely to waste time.

In many cases, the main issue is not whether a loan exists. The real issue is whether the borrower has enough down payment, enough equity, enough income, and enough time since the prior credit event to qualify for the right loan.

Understanding the Problem

Borrowers with bad credit often focus only on the credit score. Credit score matters, but it is only one part of the mortgage decision.

A lender may also review:

• Payment history
• Foreclosure, bankruptcy, short sale, or loan modification history
• Time since the credit event
• Current income
• Employment history
• Debt-to-income ratio
• Assets and reserves
• Down payment or equity
• Loan-to-value ratio, also known as LTV
• Property type and occupancy
• Purpose of the loan
• Exit strategy, especially for short-term or private money financing

Some borrowers may qualify for FHA, VA, or conventional financing sooner than they expect. Others may need a portfolio loan, non-QM loan, subprime-type product, or private money loan. In some cases, the best answer is to wait, repair credit, save more money, and apply later.

If you recently had a foreclosure, bankruptcy, short sale, deed-in-lieu, or loan modification, review our article on waiting periods to get a mortgage before assuming you are eligible for a new loan. Borrowers reviewing terms such as LTV, deed of trust, lien position, and exit strategy can also reference our Private Lending & Mortgage Glossary.

Step 1: Review and Understand Your Loan Options

Online research can be useful, but mortgage eligibility depends on the specific facts of the borrower’s situation.

Before applying, a borrower should understand:

• What caused the credit issue
• When the credit issue occurred
• Whether the issue has been resolved
• Whether the issue is likely to happen again
• Whether the borrower has re-established credit
• Whether the borrower has enough down payment or equity
• Whether the borrower can document income and assets

Sometimes it is simply not the right time to get a mortgage.

For example, a borrower may have recently started a higher-paying job but have limited job history, no down payment, and unresolved credit problems. In that situation, the better advice may be to stay employed longer, repair credit where possible, reduce debt, and save for a down payment.

That borrower may be in a much better position within several months, but applying too early could waste time, money, and effort.

Step 2: Attempt Credit Repair Where Possible

Credit repair can be useful, but it needs to be approached carefully and realistically.

Sometimes a borrower can improve their credit profile by paying down revolving credit card balances, correcting inaccurate information, resolving collections, or establishing a stronger recent payment history.

In other cases, credit repair may take more time.

Useful steps may include:

• Reviewing credit reports from all three major credit bureaus
• Disputing inaccurate, duplicate, outdated, or incomplete information
• Paying all current accounts on time
• Reducing credit card utilization
• Resolving valid collections or charged-off accounts where appropriate
• Avoiding unnecessary new credit applications
• Keeping older positive accounts open when practical

For more detail, review our article on how to repair your credit.

Be careful with credit repair companies that promise unrealistic results. No company can legally guarantee a specific credit score increase or the removal of accurate negative information.

Step 3: Decide Which Loan Option Is Realistic

The right loan is the loan that fits the borrower’s actual situation. Applying for a loan that cannot work usually creates frustration and delay.

Many borrowers are told that a lender can “make it work,” only to find out later that the file never met the basic requirements. That is why it is important to identify the correct loan path early.

FHA, VA, or Conventional Financing

If the borrower is far enough removed from the credit event, has re-established credit, has enough income, and meets the applicable guidelines, FHA, VA, or conventional financing may be the best option.

These loans are usually more attractive than private money or hard money loans because they are generally designed for longer-term financing and may offer more favorable pricing.

However, the borrower must meet the applicable credit, income, asset, property, waiting-period, and underwriting requirements.

Portfolio or Non-QM Loans

If the borrower does not fit standard agency guidelines, a portfolio lender or non-QM lender may be the next option.

Portfolio lenders may hold loans on their own balance sheet and may have more flexibility than standard agency lenders. Non-QM lenders may also offer programs for borrowers who do not fit traditional mortgage guidelines.

These loans may come with higher interest rates, lower maximum loan-to-value ratios, larger down payment requirements, more reserves, or more detailed documentation.

Subprime-Type Mortgage Options

Some borrowers may need a loan product designed for more serious credit issues. These programs can vary widely by lender and market conditions.

Borrowers should expect higher pricing, lower leverage, and stricter compensating factors. The worse the credit profile, the more important equity, income, reserves, and property strength become.

Private Money or Hard Money Loans

If the borrower does not qualify for institutional, portfolio, non-QM, or subprime-type financing, a private money or hard money loan may be an option in certain situations.

Private money loans are typically short-term and more expensive than conventional mortgage products. They are usually not the right solution when a borrower qualifies for better long-term financing.

However, for a business-purpose real estate transaction, a private money loan may be useful when the borrower has sufficient equity, a credible plan, and a realistic exit strategy. General business-purpose private lending parameters can be reviewed on our Hard Money Loan Programs page.

Examples may include:

• Bridge financing
• Real estate investment purchases
• Business-purpose cash-out loans
• Construction or rehab financing
• Short-term financing while working toward sale or refinance
• Situations where timing or property condition does not fit conventional lending

For construction-specific scenarios, borrowers can also review our Hard Money Construction Loans page.

Step 4: Apply for the Right Loan

Once the borrower understands the realistic loan options, the next step is to apply for the loan that actually fits the situation.

This is where working with the right professional matters.

A borrower should avoid applying blindly with a lender who is only trying to force the file into a program that does not fit. A good lender or mortgage professional should be able to explain what is possible, what is not possible, what documentation is needed, and what the borrower can do to improve the file.

The goal is to apply for the right loan the first time, rather than wasting time on a loan that cannot close.

When Waiting May Be the Best Strategy

Sometimes the best mortgage strategy is to wait.

That may be true if:

• The borrower recently changed jobs
• The borrower has no down payment or limited equity
• The credit event is too recent
• Credit card balances are too high
• Collections or charge-offs need to be addressed
• The borrower does not have sufficient reserves
• The borrower’s exit strategy is unclear

Waiting is not always a bad outcome. A borrower who waits six to twelve months, improves credit, saves more cash, and documents income may qualify for a better loan with better terms.

Why Private Lending May Be Different

Private lending is different from traditional mortgage lending because the lender may focus more heavily on the property, borrower equity, loan-to-value ratio, business purpose, and exit strategy.

Credit still matters, but it may not be the only factor.

At FK Capital Fund Inc., we provide business-purpose private lending solutions throughout California, including bridge loans, hard money construction loans, rehab loans, and select real estate-secured financing scenarios. Examples of prior lending activity can also be reviewed on our Featured Transactions page.

Each loan request is reviewed based on the facts of the transaction, including the property, borrower, equity, structure, and repayment plan.

Final Thought

Getting a mortgage with bad credit is possible in some situations, but the borrower needs to be realistic.

The right path may be FHA, VA, conventional, portfolio, non-QM, subprime-type financing, private money, or simply waiting until the file is stronger.

The most important step is to identify the right loan option early, repair credit where possible, understand waiting periods, and avoid wasting time on a loan that cannot work.

If you have a California business-purpose real estate financing scenario, FK Capital Fund can review the loan request based on the property, borrower, structure, equity, and exit strategy.

Submit your loan scenario for review.

For general questions, you can also contact FK Capital Fund here.

Frequently Asked Questions

Can I get a mortgage with bad credit?

Yes, some borrowers can get a mortgage with bad credit, but the available options depend on the credit issue, timing, income, assets, down payment, property, and loan program. Some borrowers may qualify now, while others may need to repair credit or wait.

What is the best mortgage for bad credit?

The best mortgage for bad credit depends on the borrower’s specific situation. FHA, VA, conventional, portfolio, non-QM, subprime-type, and private money loans may all be options in different circumstances.

Should I repair my credit before applying for a mortgage?

In many cases, yes. Paying down revolving balances, correcting inaccurate credit reporting, resolving valid collections, and building clean recent payment history may improve loan options.

Can private money help if I cannot qualify for a traditional mortgage?

Private money may help in certain business-purpose real estate scenarios where the property, borrower equity, loan-to-value ratio, and exit strategy support the loan. Private money is usually short-term and more expensive than traditional financing.

How do I know which loan to apply for?

The right loan depends on your credit history, income, assets, property, loan purpose, timing, and available equity or down payment. A qualified mortgage professional or private lender can help identify which options are realistic.