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How To Get A Loan With A Bad Credit Score: 3 Easy Steps.

Do you have a bad credit score and you want a loan? is it a 500-640 credit score? Here’s how to get a mortgage loan approval fast.

We have a three-part plan to help you get a loan with a low or a bad credit score number.

  1. Pick your timeline number
  2. Understand the core problems and then
  3. Start taking action

I’ve personally funded loans for people all the way down to a minimum of 515 credit score. One of the kindest people I’ve ever worked with as a buyer was a disabled guy but he was about the same age as me.

He had a 515 credit score because of some past medical debt and some other things that he wasn’t able to keep up with again because of that disability he had.

We were able to get him into a VA loan, with zero percent down, zero monthly mortgage insurance, and a fantastic interest rate all with a 515 credit score.

Pick your timeline:

There are two main timelines that you might be running into:

  1. The first one this option is a bit faster and it is the fastest option. It is to buy a home right now with low credit. We’ll talk about what that means.

Some strategies shared here, you’ll buy now then build credit while you’re in your home and then you can refinance into a cheaper loan. Because if you buy from the beginning you will run into an issue where the interest rate might be higher or the terms might not be favorable for you then.

2. The second one is to look at building credit first and then buying later. This process is slower.

All right so you want to pick one of these two timelines and figure out what works for you. We’ll explore this article to make you understand which way will be best for you moving forward after you have picked your timeline.

2. Understand the core problems

When you want to understand what’s the core problem because we’ve talked a lot about it. We say things like, okay I have bad credit but what exactly about the credit is bad? It’s simple, there’s something specific about the credit history that’s holding you back from purchasing a loan.

It’s not just having a vague idea of bad credit or mere affirmation that there’s good credit and there’s bad credit. Despite there’s credit amongst all, these meanings can vary and they each have different stories and components that we need to figure out to fully understand it.

Sometimes I hear people talk about this idea of how well the system is rigged to get to them and it’s really not because they know mortgages but because they understand the fact that it has rules just like when we are playing a game of monopoly.

It has rules, to win the game you have to follow the rules and so this article is just explaining to you these rules that you need to follow on how to get a loan with low credit.

 It’s not about who you are as a person; it’s just simply you and your current situation. Your current credit might be outside of the rules and of course, you’re not going to be able to play the game if you’re not playing by the rules.

I’m going to teach you what the rules are so you can figure out how you can actually play the game and win or do whatever is in monopoly.

 I haven’t played bad these years so understanding the core issue or issues that are going on with your credit is going to help you create a plan moving forward, that way you can talk with a credit coach or you can figure out your timeline or you can talk with a lender and say i know this is what’s holding me back.

Until we know exactly what’s holding us back we’re going to feel like everything’s stacked up against us. We need to know specifically what the problem is:

Some core problems

1. Know the minimums

So first let’s talk about the minimums because this is the first problem that you’re going to run into, There are minimum credit scores with each main loan type.

Here are the four main types of loans conventional, FHA, VA, and USDA. The conventional minimum credit is 620. Conventional loans are super difficult to do if we have rough credit, even if we have a 620 plus. Let’s say we have 620 but we have some missed payments, here it might be difficult to qualify.

Conventional, FHA is then the most common that you’ll see in the low credit score or bad credit space and there are two different minimums that change the down payment.

Fha goes all the way down to a minimum of 500 credit score; not all lenders do that but that is the base minimum score and so we can work to find a lender that uses a 500 score as a minimum.

If we do 500, the down payment is 10, if we have a 580 plus then the down payment is 3.5 so you can see the down payment changes based on the credit score you might be thinking, well I can only afford 3.5 down and so my credit score is maybe 560.

There’s our first issue, we need to work on getting the credit score up so we can afford the smaller down payment. VA and USDA are two other options.VA goes down to 500 and USDA goes down to 500 as well.

These are a little bit more niche because VA is only for veterans, USDA is only for rural areas and there’s an income limit as well. So they’re more restrictive that’s why FHA is going to be the most common and we’ll talk mainly about FHA here.

VA goes down to 500 although most lenders won’t do VA unless at 620. it’s kind of an overlay that they have, it’s just a role that they want but there are still lenders that do down to a 500.

Again I funded a 514 as the lowest credit score loan that I’ve done on a VA loan. Usda goes down to 500 however this has to be manually underwritten, whereas 640 allows you to do automated underwriting and I’ll explain that here in the future.

2. Know the other half of the story

This article about your credit score is half of the story and sometimes I think that’s where we get tripped up, sometimes the talk of people who have a 640 or 680 and still have issues getting qualified because again credit score is only part of the story, it’s only one number. The other half is why the credit score is there in the first place.

There’re events that caused the credit score to get there or that caused more to the story than just the score itself. This can be things like bankruptcy, foreclosure, a short sale, a deed in lieu of foreclosure of any collections accounts that you have missed payments, and medical bills.

These are things that are in tandem, and work with the credit score, so the credit score is going to just show a number; an overall number about what’s happening but it doesn’t tell the details of the story.

Mortgages are interested in the details of the story along with the number. So we might have again above those minimums, we might have a 520 credit score, great! we can qualify for an FHA loan If we have 10 down but we might have had a bankruptcy that was super recent and that keeps us from qualifying, so that’s something we have to watch out for.

Understand the waiting period

So here are the waiting periods for some of these events: For a deed in lieu of foreclosure it’s a three-year waiting period, if you have a foreclosure it’s three years as well even if the foreclosure was included in the bankruptcy, you have to use the date of the foreclosure and not the date of the bankruptcy, discharge for a short sale it’s three years while bankruptcy it’s two years from discharge.

This one is a little bit tricky basically the rule is 12 months of on-time payments and court approval and that qualifies you for a manually underwritten loan For an automated approval which is USDA. You have to have a minimum of two years waiting period to be able to get an FHA loan.

Mortgage leads again if you’re doing an automated approval you can have up to three 30-day late 160 days late and 190 days late.

However automated approval doesn’t often give approval on those numbers and manual requires 12 months of no mortgage latest.

Understand loan approval:

This brings us to two types of underwriting; if you have bad credit you’re going to be exploring two different types; most people aren’t familiar with because they go through automated underwriting.

1. Automated Underwriting:

Basically automated underwriting or automating underwriting software (aus) is when a computer software says you’re either approved or refer which is basically what the computer can’t preview so computer software is going to take in information from your loan application and information that your loan officer put in.

They are going to basically say thumbs up or thumbs down to the loan and most lenders like to see the thumbs up because that’s the easiest.

2. Manual Underwriting:

It’s easiest when the computer can evaluate the loan based on its risk profile however when the computer can’t it gives a thumbs Down it’s where it’s going to say refer.

It’s not going to say deny rather it’s going to say refer. So when you have this “refer” it’s going to push you into manual underwriting and manual underwriting is basically where instead of the computer software giving a thumbs up or a thumbs down an underwriter themselves have to comb through tons of details about your credit and your personal situation to see if they’re going to be willing to give you a loan or not and so the criteria for the loan becomes a lot tighter and you’re often running into higher interest rates because these loans are riskier than if a computer approves it based on its risk profile so you may be running into this if you’re getting a loan with bad credit.

All right so with manually underwritten loans, since the computer can’t approve it they want to look for what’s called compensating factors, basically what things can offset the computer to saying no? what can we show that gives the underwriter a better feeling that we can pay back this loan even though we didn’t get approved by the computer? A huge thing with manually underwritten loans is 12 months of on-time rental payments.

If you’ve been late with your rent

All right so here’s another thing where we can spot issues, if you’ve been late on your rent you’re not going to be able to qualify for a loan, unfortunately, we’re going to need to extend that timeline until you have 12 months on-time rental payments, that’s huge for manually underwritten loans, also reserves normally one to three months’ worth of reserves which is your future housing payment.

Your future mortgage payment is going to be a thousand dollars a month with taxes, insurance, and everything, then you need to have one to three thousand dollars extra in your bank account after you pay your down payment closing costs, that’s what reserves are, basically, the lender wants to see that you didn’t empty out your bank account to be able to qualify for a loan, they want to make sure once you pay down payment closing costs you can still afford the monthly payment, they’re also going to put a limit on the late payments that you could have and this is going to depend on the lender and the type of loan but for instance, they might say we only allow one installment late in the past 12 months or maybe they say zero late on a revolving account and so it’s going to depend again by the lender.

They’re overlays on the type of loans so you’ll want to talk to a loan officer that I suggest here at the end to figure out what’s going to be required there and there are also limits on the debt-to-income ratio.

So how much debt you’re able to take on if you’re going with automated approval, if you’re able to get approved by the computer software you can often take out a lot more mortgage than if you get a manually underwritten loan if you do manually underwritten it’s going to shrink how much you’re able to take on as a mortgage payment.

Fha compensating factors with debt income ratio [Image source: Supermoney]

So here’s a chart, this is fha compensating factors that correlate with the credit score and the debt to income ratio. It can be a little confusing for a second, let’s work you through a scenario here, let’s say for instance you have a 580 credit score, and a loan officer runs your loan through the software and it comes back and it says refer, it says hey you can’t get approved okay so we need to go manually underwritten.

 Say a 580 credit score, let’s first look over here in this left column, we can do any of these three: what we can see over here are the ratios for the loan as well as how much debt we can take on our loan and so for some people this might be perfectly fine as a 31/ 43 debt to income ratio.

 If you’re curious about debt to income ratio, what it is I have another article on how to figure that out for yourself and how much debt to income ratio you need. Basically, this is saying, if you have a 580 credit score we’re doing a manually underwritten loan. As long as our debt-to-income ratios fall within this range of 31 front end and 43 back end, then we don’t need any compensating factors.

 This is great, we don’t need anything extra, we have on-time rental payments and everything else should be good, as long as we don’t have any extra late that the lender doesn’t want to see.

However, if we need to stretch this a little bit higher maybe we need to go to 47 instead of 43, we need one of the following: verified documented, cash reserves, minimal increase in housing payment or residual income which is a different calculation we won’t get into but maybe as we go up to 47 we’ll need cash reserves or maybe we need to go up to 50 and we’ll need two of the following: maybe we need cash reserves and minimal increase in housing payment.

Your lender can help you specify what this is but basically what we can see here is there’s this correlation between if we need automated approval or mainly underwritten then we can follow in the next step; for a manually underwritten loan where does our credit score need to be for how much debt to income ratio we need.

Once we’re in there what kind of compensating factors do we need, it’s kind of a flow chart that goes down and you can see what the issue stopping you from getting along. Because a lot of people aren’t familiar with this and again sounds like why do I need to know all this? well, you need to know all this because you need to know why aren’t you able to qualify for a loan, is it because you’re not meeting the minimum credit score limit? is it because the software didn’t approve you? is it because of your debt-to-income ratios? because of compensating factors?

 There are things stopping you from getting the loan even if you might be able to get around if you understand what the rules are of the game that way you can come to a lender and say hey I know I have a 520 credit score I only need this amount of debt to income ratio and I have these compensating factors that are going to help you get a loan, get that processed through instead of a lender just saying yeah we don’t do many underwritten loans and then pushing off somewhere else.

You need to come to the table knowing exactly what you need, that way you can get this pushed through easily, unfortunately, a lot of lenders just don’t do underwritten loans or they’re not familiar with them, I started doing them because you know I was coming across a lot of people who I wasn’t able to get qualified through underwriting software but at the same time like I didn’t want them to not get a loan and i also needed a paycheck so I was like I’m going to figure out the rules of this so I can help people get into a loan the way that they want to and help them get through the rules.

 Helping them understand how it is, so they can qualify for a mortgage if they want to.

3. Take action to get a loan with bad credit

 Step three is to start taking action, so you figured out what is your timeline, maybe you wanted to build credit first cool, and then buy a house, that’s perfectly fine! if that’s what you want to do or you want to buy a home first and then build credit; great that’s what this article is about I’m not here to tell you what you should or shouldn’t do that’s up to you, you’re going to have to do your own research on what you want to do moving forward with your timeline.

 If you did that, then you figured out what is the core problem what’s the main thing that’s holding you back from qualifying for a loan that way you can start taking action which is step three.

Don’t let credit get in the way and then just sit back and mope helplessly. I see this happen so often, either it’s things that happened in the past, can be something that you did, or something external that happened and your credit is in a place where you can’t qualify. Rather than just sitting and feeling defeated and like everything is against me. I’m just not going to do anything like complain, that’s never going to get you to where you want to go, if you have a direction that you want to head in, you have to do the things to go in that direction you can’t just sit and be idle and expect things to change around you.

Expect work

So expect work that you’re going to do on your credit, to work through this loan process, this loan is not going to be easy right? there are countless people that have been able to get approved through mortgages with less than a 600 credit score anywhere between 500 to 600 but they’re not easy loans to do, they’re going to require work, they’re going to require paperwork, it’s going to be frustrating and exhausting, just expect that to be par on the course.

They’re not easy loans to do and you’re going to be working with lenders who may be slower because they take on loans like this so just expect it right?

When you come up with a cause of the problem, don’t take it personally, this is just part of the rules of the game, we have to follow the system to be able to get what we want.

Explore manual underwriting:

Also, explore manual underwriting, there’s no way I can make an article that’s short enough to explain all the different intricacies of manual underwriting for all different types of loans but I’ll have your search for the handbooks “the guidelines that lenders use for FHA USDA and VA” on google so you can check those out again read through to see what is the problem that’s keeping you from qualifying for a loan, see if there are compensating factors you can use to help yourself qualify.

Work on a credit plan

Also possibly look at working on a credit plan, maybe you want to do a hybrid of those two timelines, perhaps you want to work on credit for the next two to three months and then buy a home, maybe you want to buy a home now, perhaps you want to work on credit for a year before you buy a home; either way it’s usually beneficial if you have a credit plan to work on things to improve your credit.

So look at something like my credit guys, I really don’t get any affiliates or anything from them but they help me in building credit and that’s basically what we’re looking to do.

 With a credit plan, it is your wanting to tell a better story, while your credit score tells a story about how you handle debt and how you pay back debt. If you have bad credit unfortunately your credit score it means your credit history has been telling a bad story about the way that you handle money.

 Again whether that was your fault or someone else’s, doesn’t really matter it’s in the past. At this point, we’re working on a plan for moving forward.

Tell a better story

A bad story has been told already, what we need to do is now tell a better story, there’s no good story that’s not bad at some point.

The entire time of a good story includes some bad and a lot of good so if we’re at the point where it’s just some bad let’s start seeing what we can do to tell some more good story.

Examples are more good ways how to pay back debt, how we are now making on-time payments though some were late, and how we re-establish good money patterns after a bankruptcy, those are the better stories that we need to be telling.

Track your credit score:

 Also consider tracking your credit score, that way you can see if the work that you’re doing changing the momentum of your credit score, is it continuing to go up? is this thing stable? is it going down? Are the things that you’re doing or the practices that you have with money actually helping you get closer to qualifying for a loan or qualifying for a refinance that saves more money in the future?

There are tons of free ones out there myfico.com is the most accurate that I’ve seen. However, you can use any of the free ones while myfico.com is like I think 40 bucks a month so you absolutely don’t have to do it. They’re not an affiliate I’m in no way connected with them but they are the most accurate.

Where to get a loan with a low credit score in 2022:

 If you’re interested in that, here are some rent lenders that I would recommend because I often make articles like this and people will be like, who do I talk to because everyone I’ve talked to has said no?

I have no affiliation with any of these lenders I can’t vouch for them and have no relationship or connection with them I just know that these lenders do have the potential to help you if you do have bad credit and the main reason is that most of them are brokers or servicers that allow lower credit scores where most don’t, for instance, a lot of big companies will cap or will put a minimum of their credit scores even at 620 and some, even higher company like Nexa mortgage, they’re a broker, they have a wide range of options and to be able to explore they can connect you with lenders that go down to a 500 credit score.

Gustan Cho associates, also a broker have great educational resources online, they can shop around and help you find a lender down to 500.

Carrington mortgage services are often who I would use as a broker and I would direct clients to them. Basically, broker loans through them are good, there is usually no cost difference going direct through Carrington or the broker. Often going through a broker actually saves you more money than going direct.

These are some options you can explore, I would stop here and see if you can connect with somebody who can help you out right, you don’t have to take no for an answer. If somebody says hey you’re not able to qualify great, let’s move on to somebody else let’s see somebody who can help us at minimum.

We need somebody who can help us get on a game plan, we don’t need somebody just to say yes or no to us, we want to either be yes here’s the work we need to do, or no here’s the work that we need to do to be able to get you into the home or loan that you want.

Conclusion:

If you have bad credit and are looking to take out a loan, there are still options available to you. By following the tips outlined in this article, you can increase your chances of getting approved for a loan, even with a bad credit score. So don’t give up hope – with a little effort, you can get the loan you need.

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