Getting Approved for a VA Home Loan with Lower Credit Scores

Buying a home is an exciting milestone in life. But having less-than-perfect credit can make it harder to get approved for a mortgage. This is where VA loans come in. VA home loans help military service members, veterans, and surviving spouses buy, build, or improve a home even with lower credit scores or past credit issues.

In this comprehensive guide, we’ll explain everything you need to know about getting a VA mortgage if your credit score isn’t great.

What are VA Loans?

VA loans are mortgages backed by the Department of Veterans Affairs They offer huge benefits like

• No down payment required
• More lenient credit score requirements
• No monthly mortgage insurance payments
• Ability to refinance easily later on

The VA guarantees a portion of the loan protecting the lender from loss if you were to default. This allows lenders to offer VA loans to borrowers who may not qualify for conventional financing.

To get a VA home loan, you need to meet the VA’s minimum service requirements and get a Certificate of Eligibility. This certificate proves to lenders that you qualify.

VA Loan Credit Score Requirements

The VA doesn’t set a minimum credit score requirement for its loans. But most lenders have their own standards, usually between 580 and 640.

At Freedom Mortgage for example, we can often accept a minimum credit score as low as 550 for VA purchase or cash-out refinance loans.

For VA streamline refinances we generally don’t even look at your credit score. Your payment history on the existing VA mortgage you want to refinance is more important.

So while credit score is important, the VA program offers more flexibility than conventional loans that typically require scores of 620 or higher.

Factors Beyond Your Credit Score

It’s not just your credit score the lender considers. They also look at:

• Your income and assets
• Debt-to-income ratio
• Down payment amount
• Employment history
• Previous bankruptcy or foreclosure

Meeting other criteria can help compensate for a lower credit score when applying for a VA loan.

Tips to Get Approved with Lower Credit

Here are some tips to boost your chances of getting a VA home loan if your credit score is between 500 and 640:

• Make a larger down payment – Putting 5-10% down shows you’re financially committed.

• Reduce debts – Pay down credit cards and loans to lower your DTI.

• Add a co-signer – A buyer with better credit can help you qualify.

• Explain past issues – Hardships due to medical bills or job loss can be understandable.

• Show timely payments – On-time rent, utilities, phone bills, etc. establish responsibility.

• Check for errors – Make sure your credit report is accurate. Fix any mistakes.

• Improve your credit – Reducing debts and maintaining on-time payments can raise your score.

With some preparation and diligence, Veterans can still capitalize on the VA loan benefits even with less-than-ideal credit.

Refinancing Your Current VA Loan with Bad Credit

If you already have a VA mortgage, refinancing with the VA Interest Rate Reduction Refinance Loan (IRRRL) program is an excellent option. The IRRRL or “VA Streamline Refinance” allows you to refinance an existing VA loan with minimal obstacles.

Benefits include:

• No credit check or income verification required in most cases
• Lower interest rate saves money each month
• Lower payments by refinancing a 30-year into a new 30-year term
• Cash out option to tap home equity without credit check
• Allows consolidating other debts

To qualify for an IRRRL, your current VA mortgage must be season for 6+ months. You also need enough equity, and should have made at least 6 consecutive on-time payments on the current loan.

So if your credit score has dipped since getting your original VA mortgage, the streamline program allows you to refinance easily. This can help lower a payment that has become unaffordable.

Using a VA Loan to Rebuild Your Credit

One of the nice things about VA loans is that they can help you restore your credit. Making regular on-time mortgage payments each month has a very positive impact on your credit score.

Many Veterans use a VA loan as a constructive way to rebuild credit after a setback.

Making payments on time, keeping credit card balances low, and avoiding new missed payments or collections is key. But the right VA mortgage puts you back on the road to good credit.

You can check your credit reports and scores for free so you can monitor your progress after getting a VA home loan.

Alternatives if You Don’t Yet Qualify for a VA Mortgage

What if you need more time to boost your credit before getting approved? Here are some options:

• Rent for 1-2 years – Responsible rent payments help rebuild credit. Save a larger down payment during this time.

• Get a secured credit card – Making monthly payments builds credit responsibly.

• Get a credit-builder loan – These require on-time payments to establish good credit history.

• Become an authorized user – Getting added to a spouse or family member’s account can assist.

• Dispute errors – Fix any mistakes dragging your score down.

• Pay down debts – direct more money to paying off credit cards and loans.

With some diligence and patience to improve your credit first, your approval odds for a VA loan will increase significantly.

Common Credit Issues and How They Affect VA Loan Eligibility

Let’s look at a few common credit problems and their impact on qualifying for a VA mortgage:

Bankruptcy – Must be discharged at least 2 years ago. You’ll need solid finances and credit since.

Foreclosure – Also requires a 2-year waiting period before VA approval. Strong recent credit is key.

Short Sale – Wait time is only 1 year. Less negative impact than foreclosure or bankruptcy.

Past Due Accounts – Need to show you’ve paid these off and maintained positive payment record since.

** Collections** – Isolated small medical or utility collections won’t hurt approval odds by themselves. But unpaid collections indicate risk, so you must explain these.

** Consumer Proposal** – Available in Canada after a 12-month waiting period with good credit since.

** Credit Counseling** – Must prove you’ve paid these accounts successfully for 1+ years since completing counseling program.

So past credit issues don’t necessarily make you ineligible. But the more recent or severe the issue, the more time and positive credit activity you’ll need to demonstrate before getting approved.

When Credit Score Overrides are Possible

For VA loans, lenders have some discretion to approve an applicant with a lower credit score who shows:

• Strong income, assets, and cash reserves

• Solid employment history

• Large down payment to offset risk

• Strong previous relationship with lender

• Extenuating circumstances for credit blemishes

• Recent improving credit trends

So while it’s uncommon, a borrower with a score below 500 could possibly get approved in certain situations with lots of redeeming factors.

Minimum Payment and Residual Income Requirements

To receive a COE and prove your VA loan eligibility, you need to show you can make the monthly mortgage payments. The VA looks at your:

• Debt-to-income ratio – Needs to be below 41% in most cases

• Residual income after debts – Must be above the VA minimum amount based on family size and region

These two criteria ensure you can realistically handle the payment plus other living expenses.

Using VA Loans to Buy Homes in Default or Foreclosure

The VA allows buyers to purchase real estate owned (REO) homes in default or foreclosure status in some cases. This can allow you to buy a home for well below market value.

However, you’ll likely need a higher credit score for these types of transactions. Lenders view REOs as higher risk. Projected repairs and rehab costs factor in too.

But in the right circumstances, VA financing can help you transform an REO into your dream home for an affordable price.

Common Myths About VA Loans for Borrowers with Bad Credit

There are many misconceptions about VA loan requirements. Here are a few important truths:

VA loans never require PMI – Due to the VA guarantee, mortgage insurance is never needed even with less than 20% down. This benefit saves you hundreds per month.

Co-signers are allowed – Adding a co-signer with better credit can help you qualify if needed.

Manual underwriting is an option – Not everything is automated. Situations with credit blemishes can be manually reviewed.

VA reviews all criteria – They look at the full picture, not just your credit score. Income and assets matter too.

Reflects today’s economy – VA understands credit scores have declined across society and doesn’