Getting a mortgage pre-approval with bad credit may be more simple than you originally thought. Here we’ll cover everything you need to know about getting pre-approved for home purchase, refinance, and cash out refinance with bad credit.
Can you get a mortgage pre-approval with bad credit?
Yes. Even though many lenders require good credit for mortgage approval, there are some options available even if you have bad credit.
The biggest questions that need to be answered when getting a mortgage pre-approval with bad credit:
- What is hurting your credit specifically?
- Has the issue been resolved, or will it be ongoing?
- How much do you have set aside for down payment?
- What is your income or employment situation?
The answers to those questions will be things that will be carefully considered when getting a home loan pre-approval with bad credit.
Home Purchase – Mortgage Pre-Approval with Bad Credit
If you’re looking to buy a home and you have bad credit, there are several options.
It’s extremely important the obtain your pre-approval before you start house hunting so that you know what options are available. Knowing that you qualify for the home you’re seeking will relieve you of a great deal of stress. You’ll have the confidence you need when it’s time to make an offer.
FHA – As low as 500 credit score
Without question, the most popular mortgage for bad credit is an FHA loan.
FHA loans for bad credit allow for as little as 3.5% down payment (580 credit and above), and 10% down payment (579 credit and below).
These loans are government backed and have competitive pricing. Not all lenders allow them below 580 credit. But we do.
There maximum are loan limits in every county. Check your FHA county loan limit here.
More on FHA loans for bad credit here.
VA – As low as 500 credit score
If you’re a veteran of the US military, it’s likely that a VA loan will be a great option to look into.
VA loans allow you to put 0% down and the interest rates are competitive.
There is also no monthly mortgage insurance premium on VA loans, which is a nice savings to take advantage of if eligible.
VA loans are a lifetime benefit, and can be used an unlimited number of times (just not all at the same time).
To all the veterans, thank you for your service to our country.
Check your VA eligibility here.
Alternative Financing – Portfolio Loans
A portfolio loan is a type of “outside-the-box” mortgage that allows borrowers to get approved even if they do not meet traditional lending guidelines (conventional, FHA, VA).
With a portfolio loan, there is a bit more of a common sense approach to the loan approval process.
The minimum credit score for these loans is 500, and recent bankruptcy/foreclosure/short sale is okay.
This is unique because on FHA and VA, there are several year waiting periods for a recent credit event.
If you’re below 580 credit, you can expect that you’ll need at least 20% down payment.
These are a great option if you have substantial funds set aside, have well established income, but don’t quite meet traditional credit lending standards.
Portfolio loans are available on jumbo loans as well.
If you have been told that you don’t qualify for a mortgage, it may turn out a portfolio loan is exactly what you need for the time being. Typically, you’ll refinance out of a portfolio loan once you qualify for a traditional loan.
More on portfolio loans here.
Home Refinance | Mortgage Pre-Approval with Bad Credit
If you have bad credit and you’re looking to refinance the home you currently own, these same options are available.
Popular reasons for refinancing:
- Debt consolidation – Paying off high interest debt, getting a fresh start
- Home improvement – Use the equity in the home to do upgrades
- Pay off medical collections
- Pay off tax liens or judgments
- Divorce settlement
- Lower your current interest rate
- Refinance out of a land contract
- Pull cash out to set aside reserves
With FHA you can go up to 85% loan to value ratio on a refinance and cash out refinance. So if you’re home is worth 200K, max loan amount would be 170K.
For VA loans, you can go as high as 100% loan to value ratio in some cases.
On a portfolio loan, if you’re below 580 credit score you’d be looking at getting max loan to value ratio of 75% on a cash out refinance.
More on cash out refinance with bad credit here.
Important Things to Keep in Mind
It is important to understand that just because you’re at 500 credit score, doesn’t necessarily mean you’ll qualify for the programs listed above.
Getting pre-approved for a mortgage with bad credit will require an in depth review of debt-to-income ratio, equity (or down payment), reason(s) for bad credit circ*mstances, and more.
The most important thing you can do to set yourself up for success would be to work with a lender that is highly experienced with these types of loans.
In Summary
There are several options to get a mortgage pre-approval with bad credit.
- FHA loan
- VA loan
- Portfolio loan
Get your application submitted to a lender that knows these products inside and out.
I invite you to reach out.
I invite you to reach out.Get your questions answered.
If you have been told you don’t qualify for a mortgage because of having bad credit, I invite you to reach out. We have been able to get many borrowers approved all over the country who have been told they don’t qualify.
If we cannot help, we’ll give you the tools and resources you need to take proper steps to be eligible.
