Can I Get A VA Loan With Bad Credit? A Guide To Homeownership For Veterans

If you’re a military borrower, getting approved for a VA loan with bad credit is possible, regardless of any blemishes in your financial history. The U.S. Department of Veterans Affairs (VA) will even guarantee mortgages for veterans who have overcome a previous bankruptcy or foreclosure.

Buying a home can seem like an impossible goal when you have less-than-perfect credit. However, if you are a veteran, service member, or surviving spouse, a VA home loan may provide a path to homeownership even with bad credit Let’s explore how VA loans work, what credit requirements lenders typically look for, and tips for strengthening your credit profile

What Is A VA Home Loan?

VA home loans are mortgage loans guaranteed by the U.S. Department of Veterans Affairs. This allows veterans, active duty service members reservists and surviving spouses to receive favorable loan terms from private lenders.

The key benefit is that the VA provides a guarantee to the lender, promising to pay a portion of the loan amount if the borrower defaults. This reduces risk for the lender. With less risk, lenders can relax credit standards and require little or no down payment for VA loans.

Do VA Loans Have A Minimum Credit Score?

The VA itself does not mandate a minimum credit score to qualify for a VA home loan. However, individual mortgage lenders are able to set their own credit policies when underwriting VA loans.

Many lenders look for a minimum FICO score of 620. But this varies by lender. Those with scores in the 500s may still qualify with certain lenders or by demonstrating strong compensating factors.

What Credit Score Is Considered Bad By Lenders?

Though definitions vary, FICO scores below 580 are generally considered poor. Scores from 580-669 fall in the fair range. It becomes challenging to qualify for a conventional mortgage loan once your credit score dips below 620.

But again, VA loans are more flexible. Focus less on an arbitrary credit score cutoff and more on putting together the strongest application possible.

Factors That Help Overcome Bad Credit

When applying for a VA loan with less-than-ideal credit, lenders look closely at other aspects of your financial profile. Strength in these areas can offset credit weaknesses:

Down payment – Putting down 5-10% or more shows commitment. VA loans don’t require a down payment, but having one improves your chances.
Employment history – A stable job history shows reliable income to make mortgage payments.
Income level & residuals – Higher income and money left over after paying debts (residuals) are positives.
Little new debt – Using less of your available credit is better. Frequently opening new credit accounts can be a negative.
Compensating factors – Such as receiving disability benefits or having significant savings.

Tips For Improving Your Credit

Here are some tips for veterans to boost their credit scores when applying for a VA loan:

Review credit reports from all three bureaus and dispute any errors. This can quickly give your score a bump.
Pay down balances below 30% of the credit limit on cards.
Avoid new credit inquiries by only applying for credit when necessary.
Have multiple types of credit – mortgage, auto loan, credit cards.
Set up automatic payments so you never miss a payment due date.
Sign up for credit monitoring to stay on top of your score.

Options For VA Loans With Bad Credit

VA mortgages can be used to purchase or refinance a home. Loan options include:

VA Purchase Loans

The most common loan type, used by veterans to buy a primary residence. Down payments are not required, but can help strengthen your application if you have bad credit.

VA Cash-Out Refinance

Allows you to tap into your home equity by refinancing into a larger mortgage. The cash can be used to consolidate debts which may improve your credit.

VA Streamline Refinance

Lets you refinance your current VA loan into a lower rate and payment. Does not require an appraisal or full underwriting. Much easier to qualify for than a conventional refinance.

VA IRRRL Refinance

Interest Rate Reduction Refinancing Loan. Similar to VA Streamline but with a bit more paperwork. Reduces your rate and payment on an existing VA loan.

Finding The Right VA Lender

The key to getting approved for a VA home loan with bad credit is finding the right lender. Here are some tips:

Get quotes from multiple lenders to shop for the best rates/fees. Online marketplaces like LendingTree make this easy.
Look for lenders with a reputation for serving borrowers with credit challenges.
Ask about credit repair assistance programs to start fixing your credit before applying.
Consider small community banks or credit unions which offer more personalized service.
Work with an experienced loan officer that understands the VA process and knows what it takes to get your loan approved.
Seek out VA-approved lenders versus conventional mortgage companies.

Should I Improve My Credit First?

Trying to boost your credit score before applying for a VA loan generally helps increase your chances of approval and getting a lower interest rate. But it’s not necessarily required.

Many lenders will work with your current score, as long as you meet other application requirements. If you have an urgent need to purchase now or want to refinance for a lower rate, you may not need to put off the process.

That said, taking the time to improve your credit – even if it’s only a modest 50 point gain – can make a difference in qualification and cost. Use the credit-building tips above to strengthen your profile before applying.

Alternatives If You Can’t Get VA Loan Approval

If you are not able to qualify for a VA loan, alternatives may include:

FHA loan – More lenient credit requirements, with scores as low as 580 eligible. Down payments are required.
USDA loan – For rural properties, these require no down payment and are another option for poor credit borrowers.
Subprime lender – Specializes in loans for those with bad credit but generally charge much higher rates/fees.
FHA 203(k) rehab loan – Finance a fixer-upper home purchase along with repair costs.
VA rehab loan – For veterans purchasing a home needing repairs. Includes a repair fund as part of the loan.
Rent to own – Rent a home while repairing your credit with the option to purchase later.
Lease purchase – A blend of renting and buying that lets you occupy the home while arranging financing.
Owner financing – The seller provides direct financing to you rather than going through a bank.

Don’t get discouraged if your credit needs more work to qualify for a VA loan. Persistence and diligently following credit-building best practices will help you reach your goal of homeownership.

The Bottom Line

Bad credit does not have to be a dealbreaker when it comes to buying a home with a VA loan. Look beyond credit scores at the full picture of your finances. Compensating factors and common sense underwriting may still make you eligible, even with less than stellar credit.

Find an experienced VA lender, get your documents in order, and pursue credit improvement in parallel. Stay determined and flexible. With the right approach, homeownership can become a reality sooner than you may think.

Is it possible to get a VA loan with bad credit?

Yes, you can get a VA-backed low-credit-score home loan. The VA itself doesn’t set a minimum credit score, so credit requirements are set by the lender (more on that below). However, the VA does insist that lenders scrutinize the last 12 months of payment history listed on your credit report.

Because the VA recognizes that service members face financial challenges that civilians don’t, most VA loan requirements are fairly flexible.

Key VA loan requirements: Which are flexible?

Credit score: No set minimum

As we covered above, VA loans have built-in flexibility that allows you to compensate for factors like low credit, no credit, bankruptcy or foreclosure with alternative documentation or compensating factors. You may qualify for a VA home loan with bad credit if you have enough extra room in your budget each month.

Debt-to-income ratio: 41% maximum

Your DTI ratio expresses what percentage of your gross monthly income goes toward debts, including the home loan you’re applying for. If your DTI exceeds 41%, you can still get a VA loan as long as:

• Your DTI is high because you have significant tax-free income.

• You can compensate for a high DTI with around 20% more residual income than is normally required.

Residual income

The VA uses a metric it calls residual income to assess how much free cash you have each month after subtracting your monthly expenses, including home maintenance. Residual income requirements are based on your location and family size. If you can’t meet the minimum amount of residual income required, you might be able to work around this by:

• Getting a family member excluded from your residual income calculation.

• Proving that you receive significant benefits based on your military service status.

Can I Qualify For a VA Loan With Bad Credit? (VA Mortgage Updates and First Time Home Buyer Advice)

FAQ

What is the lowest credit score for a VA loan?

The U.S. Department of Veterans Affairs doesn’t set a specific VA loan credit score requirement. Lenders, however, can set their own minimum requirements for a VA loan. Most require a score of at least 620, but some go as low as 500.

Can I get a VA home loan with a 480 credit score?

Key Takeaways. No Minimum Credit Score – The VA loan program does not enforce a minimum credit score, focusing instead on the overall loan profile. Private Lenders’ Role – Private lenders will likely have minimum credit score requirements, typically that will range between 580-620, which can affect loan terms.

Can I get a VA loan with a 550 credit score?

The VA doesn’t have a minimum credit score requirement. Instead, lenders can set their own requirements. At Rocket Mortgage, the minimum qualifying credit score is 580. Keep in mind, you can qualify for more favorable terms with a higher score.

Can you get denied for a VA loan?

VA lenders make money by approving loans, not denying them so they’ll do what they can to get your approval. When they can’t, they’ll send what is called an Adverse Action notice. This is an official form and required by law to provide you with a written explanation of why your loan was not approved.

Can you get a VA home loan with bad credit?

Veterans Guide leads you through the details of VA home loans for bad credit. The program helps service members, veterans, and surviving spouses get a home loan when they might not otherwise qualify. The VA provides guarantees to lenders that reduce their risk, making them more likely to approve funding, even for applicants with bad credit scores.

Can you get a VA loan with a low credit score?

Yes, it’s generally possible to get a VA loan with a lower credit score, around 620, but lenders may approve lower scores with compensating factors. The VA does not set a minimum credit score to qualify for a loan, so credit score minimums will vary by lender and other factors.

What is a bad credit score for a VA home loan?

You can start by looking at the FICO credit score range chart before you start shopping for a VA home loan to get an idea of what a “bad” credit score is: A “good” credit score means you’re at about the average credit score for U.S. consumers. “Fair” is below the average, and “poor” is well below average.

Does the VA have a minimum credit score for a home loan?

In fact, the VA does not have a minimum credit score for a VA home loan. A private lender might impose a minimum score, but you can try another lender if you don’t meet a certain one’s criteria. However, it is still important to be aware of credit requirements set by lenders in order to secure a VA Home Loan.