Understanding the Problem
Obtaining a mortgage with bad credit can be relatively simple as long as the prospective borrower has the right expectations. To qualify for a prime or A-Paper loan, a minimum credit score of 580 (for FHA) and 620 (for Conventional) is required. The minimum requirements do not stop there though. There are minimum waiting periods from ‘credit events’ in a borrowers credit profile. There are also maximum loan-to-value (LTV) limitations depending on the credit so getting a loan is not necessarily a problem, but having enough money down might be. Please review the Waiting Periods to Get a Mortgage in order to see where you stand.
Getting a Loan With Bad Credit
Let’s get started with the step-by-step approach.
Step 1: Review and Understand Your Options
Research online can be useful, but truly understanding what is out there would require a professional to analyze your specific situation. What went wrong? When did it happen? Is it likely to happen again? Sometimes it just is not the right time to get a mortgage.
For example, we had an application for a mortgage where the borrower recently got hired at a high-paying job. There was no down payment to think of and his credit and job history was not solid. The best advice for this borrower was to spend some more time at his current job, take some actions to repair the credit, and save for a down payment. This particular borrower could be in a much better place in as little as six months.
During this research step, determining the type of loan you should be apply for is the goal. If you can qualify for conventional or subprime, you do not want private or hard money. You also don’t want to waste your time for a loan that you do not qualify for. Many inexperienced loan officers will have you apply and force you to go through the process when there is no possible way the loan will work. This is an important step to save you both time and money.
Step 2: Attempt Credit Repair
Credit repair can be a very useful tool, but it takes time and effort to do properly. Sometimes getting your score up can be as easy as paying down a credit card a few hundred dollars; sometimes it can be more intensive. See our Step-By-Step Credit Repair suggestions or, you can contact a credit repair service, but be careful about who you hire to repair your credit because there are many services out there that might be a waste of money.
Step 3: Decide on the Best Loan Option Available
At FK Capital Fund, we specialize in private money loans, but if that type of loan is not the best choice for you, then it is important to find out what is appropriate for you. Many times a borrower has told us that such-and-such loan company says that they can do this or that. The borrower does not want to hear that that loan is not available and ends up wasting his/her time trying to get something that would never work. Often enough, the borrower calls back explaining that the loan they tried to do didn’t work and want to move forward with the loan they can actually qualify for. Here are the progression of loan options:
- If you’re far enough away from the ‘credit event’ and you have the minimum scores as mentioned above, FHA or Conventional would be the most ideal option. Sometimes people believe they would never qualify, but actually do.
- If you aren’t far enough away or you just do not qualify for one of those loans, a portfolio or Alt-A loan is your next best step. The lenders that finance these loans hold the loan on their books and have much broader powers to grant exceptions for a variety of credit issues. With a portfolio Alt-A loan, the interest rate is a bit higher (1% higher on average) and the absolute maximum loan-to-value (LTV) is 80%.
- If you do not qualify for this, a subprime loan is your next option. Again, the absolute maximum LTV is 80%, but I would expect somewhere between 50% and 80% depending on the credit issues you’ve had.
- Finally, if you do not qualify for a subprime loan and the loan is for business purposes, a hard money or private money loan may be your only choice. The loan needs to make sense of course, but if it does, you’ll want to know that it is at least available to you.
Step 4: Apply for the Right Loan
Now that you understand your loan options, have done any credit repair possible, and you have determined what loan is most appropriate, it is time to apply for the loan. Again, it is very important that you’re working with more than an order-taker. Many loan companies will try to make your square peg loan fit into a round hole. That is a waste of time for all involved. Work with the right person and apply for the right loan the first time so that you can quickly and efficiently complete the process and move on with your life.