How to Get Approved for a VA Loan with Bad Credit

Getting approved for a VA loan with bad credit may seem daunting but it is possible if you understand the process and take steps to improve your credit. As a veteran myself I know how frustrating poor credit can be when trying to take advantage of your VA home loan benefit. But with some smart moves, vets can get back on track and into homeownership.

In this comprehensive guide I’ll cover everything you need to know about getting a VA mortgage with less-than-stellar credit.

What is Considered Bad Credit for VA Loans?

First, let’s define what constitutes “bad credit” when it comes to VA lending. The VA itself does not set minimum credit score requirements – those are determined individually by lenders. A credit score below 620 is generally considered poor. Here’s a breakdown:

• Excellent credit: 720+
• Good credit: 680-719
• Fair credit: 640-679
• Poor credit: 639 or below

That said, just because your score falls into the poor range doesn’t mean automatic denial. VA loans are an exception in the lending world, with more flexible credit guidelines than conventional mortgages.

Can You Get a VA Loan with Bad Credit?

The short answer is yes, you can qualify for a VA loan even with less-than-perfect credit. While many lenders stick to a minimum score around 620, some may approve borrowers with scores in the mid-500s.

The key is finding a lender like Veterans United that offers credit counseling and can help you strengthen your application with compensating factors. Their team has guided many vets just like you down the path to homeownership.

Tips for Getting Approved with Poor Credit

While bad credit presents challenges, vets can better their chances by following these tips:

• Pay down debts – Reducing credit card balances and other debts boosts your score and debt-to-income ratio.

• Check for errors – Review credit reports thoroughly and dispute any mistakes. Errors could be dragging down your score.

• Explain past issues – If you had events like bankruptcy or foreclosure, be ready to explain them to your lender.

• Highlight strengths – Emphasize positives like your long employment history, assets, military benefits, and rental history.

• Consider down payment assistance – Programs for veterans can help with down payments and closing costs.

• Get expert guidance – Work with a VA specialist who knows how to help borderline borrowers get approved.

Factors Lenders Consider with Lower Credit Scores

When looking at applicants with poor credit, lenders weigh several factors:

Compensating Factors – Strengths that help offset credit weaknesses, like significant assets, low debts, military benefits, and solid employment history.

Down Payment – For purchase loans, a larger down payment signals lower risk. Ideal with bad credit.

Debt-to-Income Ratio – Your total monthly debts versus gross monthly income. Aim for 36% or lower.

Types of Credit Issues – Foreclosure seen as riskier than medical collections. Also check seasoning on past events.

Recent Credit Activity – Are you continuing to miss payments? Or showing positive changes? Patterns matter.

VA Residual Income – The money left over each month after paying debts and living expenses. Higher = better.

Credit Inquiries – Too many can signal risk, so avoid new credit accounts when applying for a mortgage.

Steps to Improve Your Credit Score

While getting approved for a VA loan with bad credit is possible, taking steps to improve your score can make a huge difference:

• Pay all bills on time – Payment history is 35% of your FICO score. Set up reminders if needed.

• Keep credit card balances low – 30% or less of your limit is ideal.

• Limit credit inquiries – Each application can ding your score a few points. Only apply for what you need.

• Check reports and dispute errors – Even small mistakes can drag down your credit.

• Wait for negative remarks to fall off – Most public record items fall off reports after 7 years.

• Don’t close old accounts – Length of credit history is important. Keep old accounts open.

• Open new credit carefully – Space out new accounts to avoid too many inquiries.

• Pay down debt – Owing less helps utilization and your debt-to-income ratio.

• Use credit builder loans – These help establish positive payment history.

With some diligence and an expert VA lender on your side, there are paths to approval even with less-than-ideal credit. As a veteran, you’ve earned this benefit, so take the right steps and realize your dream of homeownership.

FAQ on VA Loans for Poor Credit

Still have questions about getting a VA home loan with bad credit? Here are answers to some frequently asked questions:

How long does it take to improve credit for VA loan approval?

It depends on your specific situation, but most people see noticeable improvement around 6 months of diligent work on improving their credit profile. Keep making on-time payments, reduce debts, and check for errors.

What credit score is needed for a VA mortgage?

The VA itself does not set minimum scores, but many lenders look for at least 620. With scores in the 500s, approval is possible with compensating factors. Shop VA lenders to compare credit requirements.

Does a lower credit score increase VA loan rates?

Yes, typically a lower credit score translates to a higher interest rate from lenders. The impact varies based on other factors like your down payment amount. Shopping with multiple VA lenders can help you secure the best deal.

Should I avoid VA loan lenders advertising bad credit?

Lenders touting bad credit loans may charge higher rates or fees, so read the fine print carefully. You’re often better off improving your credit profile and applying with a reputable VA lender.

Will credit counseling help my VA loan chances?

Absolutely. Reputable credit counseling provides valuable guidance on improving your score and financial profile. Many VA lenders offer these services to help you get mortgage-ready.

How long do I have to wait after bankruptcy or foreclosure?

It’s typically 1-2 years after a bankruptcy or foreclosure until you can qualify for a new VA loan, but every situation is different. Talk to a lender about your specific circumstances.

Let’s Get You into Your New Home

As I can attest first-hand, purchasing a home through a VA loan is life-changing. While bad credit can seem like an insurmountable obstacle, it is possible to overcome with smart financial moves and an experienced lender. I’m happy to help explain VA mortgage options and point you in the right direction to start building your future as a homeowner. You’ve served our country honorably. Now let me serve you!