What is the Best Mortgage for Bad Credit?

With so many lenders and banks out there, it can be hard to sort out what makes sense for your situation. Here we’ll cover the top 3 best mortgage for bad credit and what to expect when looking to get approved.

Top 3 Best Mortgages for Bad Credit

The 3 most widely used products when looking to get approved for bad credit are portfolio loans (Non-QM Loans), FHA loans, and VA loans. All of these loan types allow for as low as 500 credit score.

1. Portfolio Loans

A portfolio loan (also called non-QM loan) is a mortgage type that allows borrowers to get approved even if they do not meet traditional lending guidelines.

These are especially popular if you have recently had a bankruptcy, foreclosure, or short sale.

You can think of a portfolio loan as an “outside-the-box” type of mortgage because they have different (less strict) guidelines than conventional, FHA, and VA mortgage loans.

With a portfolio loan there is no waiting period after a bankruptcy, foreclosure, or short sale has taken place. This is a huge win for many borrowers, because in the traditional mortgage world, there are waiting periods that can be up to 7 years.

Pros and Cons of Portfolio Loans

Pros:

As low as 500 credit score is allowed
No waiting period after bankruptcy, foreclosure, or short sale
Can get you approved when most lenders say it’s not possible
Great temporary fix for temporary circumstances (refinance into traditional mortgage when you qualify)

Cons:

May have higher rate/cost than traditional mortgage
May require higher reserves (money shown in the bank) than traditional mortgage
Requires higher down payment than traditional mortgage

A portfolio loan is not only the best mortgage for bad credit, it is also a good option if you need to get approved with alternative income documentation.

An alternative documentation loan is when the loan is for self-employed borrowers who need their income to be reviewed in a non-traditional way.

Alt-doc loans can be done as a bank statement loan, profit and loss mortgage, or cash flow mortgage. More on alt-doc loans here.

Things to keep in mind when getting a portfolio loan

Minimum down payment is 10%
As low as 500 credit score is allowed
Recent bankruptcy, foreclosure, or short sale is okay
Available on home purchase, refinance, and cash out refinance
Allowed on primary residence, vacation home, and investment property
Minimum loan amount is 100K

2. FHA Loans for Bad Credit

Although FHA guidelines clearly allow as low as 500 credit score, the vast majority of lenders do not allow them to be done below 580. But we do.

The reality is that when getting approved for FHA loan below 580, the underwriting process can be a little more labor intensive for the lender and borrowers alike.

More explanations are needed, and more connecting of the dots are called for because below 580 credit is more of a “risky” loan in the eyes of a lender.

Automated vs. Manual Approval on FHA Loan

When your application is submitted to the lender, they will submit it through the desktop underwriting system to confirm whether or not the loan meets FHA standards.

The loan will either get findings of Approve/Eligible, Refer/Eligible, or Refer w/ Caution.

Approve/Eligible means the application appears to meet FHA standards and as long as the data is correct (income, credit, assets, etc.), the loan should be approved.

Refer/Eligible means the application might not meet FHA guidelines and the loan needs to be manually underwritten for a determination to be made. Most lenders do not allow manually underwritten loans because they tend to slow down production. But we do.

Refer w/ Caution means the application does not meet FHA guidelines and the loan application cannot proceed.

Things to keep in mind when getting an FHA loan with bad credit

As low as 500 credit score
As low as 3.5% down payment (580+ credit)
10% down payment with 579 and below credit
3 year waiting period from foreclosure
2 year waiting period from chapter 7 bankruptcy
Available on primary residence only
Available on home purchase, refinance, and cash out refinance.
Cash out refinance available for up to 85% loan to value ratio

3. VA Loans for Bad Credit

If you are a veteran of the United States military, thank you for your service to our country. Semper Fidelis. I proudly served in the USMC from 2004-2008, and always do my very best to get my fellow veterans approved if at all possible.

VA loans can be approved with as low as 500 credit score. It is without question the best mortgage for bad credit if you’re an eligible veteran. Check eligibility here.

The approval process is similar to the FHA guidelines as far as the lender submitting your file to the desktop underwriter to be reviewed for eligibility.

What’s different with VA loans is that you can still do 0% down even if you’re below 580 credit score.

VA will also allow cash out refinance up to 100% loan to value even if you’re below 580 credit.

Many veterans have the misunderstanding that they can only use their VA loan benefits once. That is absolutely not the case.

The VA loan is a lifetime benefit for eligible veterans and can be used an unlimited number of times. See eligibility requirements here.

Things to keep in mind when getting a VA loan with bad credit

As low as 0% down payment
As low as 500 credit score allowed
Available on primary residence only
Available on home purchase, refinance, and cash out refinance
Cash out refinance available for up to 100% loan to value ratio

In Summary

The 3 best mortgages for bad credit are:

Portfolio Loan
FHA Loan
VA Loan

Each option has different eligibility requirements. For that reason, it’s best to connect with an experienced team to figure out which option is most suitable for you.

If you have been told you do not qualify due to the way your income is shown, I invite you to reach out.

We have been able to help many borrowers who were told by other lenders that they don’t qualify. If I cannot help, I will point you in the right direction at the very least.