Can I Get a VA Home Loan With Bad Credit?

Getting approved for a mortgage can be difficult if you have bad credit. Many lenders are hesitant to provide financing to borrowers with low credit scores due to the perceived risk. However, if you’re a veteran or active military member, a VA home loan may be an option even with less-than-perfect credit. In this comprehensive guide, we’ll explore how VA loans work, what credit scores are considered “bad,” and steps you can take to improve your chances of getting approved.

What is a VA Home Loan?

VA home loans are mortgage loans guaranteed by the Department of Veterans Affairs. Their purpose is to help eligible borrowers purchase, build, repair, retain or adapt a home.

Some key things to know about VA loans

• They require little to no down payment – 100% financing is possible.

• There are no monthly mortgage insurance premiums

• The funding fee can be rolled into the loan,

• There are no strict credit score requirements imposed by the VA.

• VA loans can only be issued by approved lenders.

• Eligible borrowers include veterans, active duty members, reservists and surviving spouses.

The VA doesn’t directly issue the loans, but provides lenders with a guarantee against loss if the borrower defaults. This gives lenders more confidence to approve applicants who may not qualify for conventional mortgages.

What Credit Score is Considered Bad for a Mortgage?

Credit scores range from 300 to 850. The higher the score, the lower the perceived risk. According to FICO, here is how scores are generally classified:

• 800-850 = Exceptional
• 740-799 = Very Good
• 670-739 = Good
• 580-669 = Fair
• 300-579 = Very Poor

For conventional mortgages, scores below 620 are often considered subprime and make approval difficult. However, the VA itself does not impose any minimum credit score requirements. The lender makes the final determination based on their own guidelines. Many lenders do prefer scores of at least 620, but it’s not necessarily a hard cutoff.

Can I Get a VA Loan With Bad Credit?

Yes, it is possible to get a VA loan with bad credit, including scores below 620. While lenders generally prefer higher scores, the VA guarantee enables them to take more risk on applicants with poor credit.

That said, approval is not guaranteed. Lenders will look at your entire financial profile, including income, assets, debts and credit history. They want to verify you can manage the mortgage responsibly. Factors that help compensate for bad credit include:

• Steady income and employment
• Significant cash reserves
• Lower debt-to-income ratio
• Prior experience as a homeowner
• Strong rent payment history

VA loans also have more lenient guidelines following bankruptcy, foreclosure or short sale compared to conventional loans. Waiting periods can be as little as 1-2 years.

Bottom line: Work with a reputable VA lender and be completely transparent about your financial situation. Provide documentation to highlight your strengths as a borrower despite the low credit scores. Many veterans are able to qualify with scores in the 500s or below.

Tips for Improving Your Credit Score

While VA loans offer more flexibility for bad credit, taking steps to improve your score can make the mortgage process much smoother. It increases your chances of getting approved and often leads to better loan terms like lower interest rates. Here are some tips:

Review your credit reports – Make sure there are no errors negatively impacting your scores. You can get free reports annually from annualcreditreport.com.

Pay bills on time – Payment history is the biggest factor in credit scoring. Even just one late payment can significantly hurt. Set up autopay or reminders to avoid missed payments.

Keep balances low – High credit utilization also hurts your scores. Aim to keep balances below 30% of the credit limit on each card. Pay off debt rather than moving it around.

Avoid new credit – New accounts lower your average account age which has a negative impact. Wait to apply for new credit until after you apply for a mortgage.

Monitor your scores – Sign up for free monitoring services to see how your scores change over time. This lets you see the impact of your credit management efforts.

Consider professional help – Credit repair companies can help remove incorrect negative items from your reports. This can boost scores more quickly than self-monitoring.

With diligence and patience, it’s possible to improve scores by 50-100 points or more within 6-12 months. That can make the difference in getting your VA loan approved.

Common Concerns About VA Loans and Bad Credit

If you’re worried about getting a VA loan with bad credit, here are answers to some common questions:

How low of a credit score can I have?

There is no firm cutoff, but many lenders require minimums between 500 and 620. The lower the scores, the harder to get approved.

Will I need a down payment?

No, VA loans allow 100% financing in most cases even with bad credit.

Do I need to wait before applying after bankruptcy/foreclosure?

Yes, 1-2 years is recommended based on VA requirements. Conventional mortgages often require much longer waiting periods.

Can I be denied after the lender preapproves me?

Yes, you can still be denied after preapproval if new negative information appears during underwriting or you no longer meet requirements.

How can I check my eligibility?

Work with a VA-approved lender to have them prequalify you based on a review of your financial profile.

Partner With a Trusted VA Lender

As a veteran or military member, a VA loan can make homeownership possible even with less-than-ideal credit. Be upfront about your financial situation and provide documentation that highlights your strengths as a borrower. Compensating factors will ease lender concerns about risk.

Improve your credit as much as possible before applying, but don’t delay if you find the right home. With persistence and the right lender, there are many possibilities to get approved. Let a VA home loan specialist guide you through the process from start to finish. You’ve earned this benefit through your service – use it to make homeownership a reality.