Getting a VA Home Loan With Bad Credit: A Complete Guide

Getting a mortgage can be difficult for anyone but it can be especially challenging if you have bad credit. Fortunately if you are a veteran or active military member, VA home loans offer a path to homeownership even if your credit score isn’t perfect.

In this comprehensive guide, we’ll explain everything you need to know about getting a VA home loan with bad credit.

What is Considered Bad Credit for VA Loans?

There is no single credit score cutoff for “bad” credit with VA loans. The VA itself does not set any minimum credit score requirements. Rather individual lenders establish their own credit standards for borrowers.

That said, a credit score below 620 is generally considered poor. Here’s how the most widely used credit scoring model, the FICO score, categorizes credit:

• 800-850: Exceptional
• 740-799: Very Good
• 670-739: Good
• 580-669: Fair
• 550-579: Poor
• Under 550: Very Poor

So if your score falls in the fair range or below, you can expect to have more difficulty getting approved for a mortgage, including a VA loan.

Can You Get a VA Loan with Bad Credit?

Yes, it is possible to get a VA-backed mortgage with less-than-stellar credit, but your options will be more limited than borrowers with good credit.

Each lender sets their own minimum credit standards for VA loans. Some may be willing to go down to a score of 550 or 600, while others draw the line at 620.

Navy Federal Credit Union, for example, requires a minimum 620 FICO score for VA purchase loans, but other lenders may go lower.

That’s why it’s important to shop around with multiple lenders if your credit score is on the lower end. Expand your search beyond banks to include credit unions and online mortgage lenders.

While shopping around can help, expect to pay a higher interest rate than borrowers with better credit. The lower your score, the higher your rate will likely be.

Factors Besides Credit Score

It’s not just your credit score that determines if you can qualify for a VA loan. Lenders will look at your full credit profile, as well as your income, assets, and debts.

Key factors lenders consider include:

Credit history length – The longer you’ve been using credit, the better. A history shorter than 3 years could make approval tougher.

Payment history – Having late payments and collections can hurt, even if your score is decent. Timely payments help.

Credit utilization – Lower balances relative to your limits are ideal. High balances can negatively impact your chances.

Debt-to-income ratio (DTI) – Total monthly debt payments divided by gross monthly income. Most lenders look for DTI below 41% for approval.

Down payment – While VA loans don’t require a down payment, putting at least 5% down shows you’re financially committed.

Assets and reserves – Having substantial assets and post-closing cash reserves makes approval more likely.

Compensating factors – Positive factors like significant retirement savings could help offset negative credit.

A lender will look at the full picture, not just your credit score. Having compensating strengths in other areas can improve your chances.

Steps to Improve Your Credit for a VA Loan

If your credit score is under 600, taking steps to improve it before applying for a VA loan can make a big difference. From about 550 to 620 is generally considered the “subprime” range by lenders. The higher you can boost your score within this range, the better.

Here are some tips for credit improvement:

Review credit reports and dispute errors – Errors on your credit reports could be dragging down your score. Dispute any mistakes.

Pay down balances – Try to lower your credit utilization below 30%. Pay down cards and other revolving accounts if possible.

Pay all bills on time – Payment history is very influential. Don’t miss any bill payments if you can avoid it.

Limit new credit applications – New accounts may lower your average age of credit. Only apply for what you need.

Build positive credit history – Become an authorized user on someone else’s account in good standing. Or secure a credit builder account or secured card.

Watch your credit mix – Lenders like to see a healthy mix of installment loan accounts (like auto, mortgage, student loans) and revolving accounts (credit cards).

Consider credit counseling – If your credit is poor due to financial hardship like divorce or medical bills, a counselor could help you make an action plan.

With diligence and smart money moves, you can gradually rebuild and strengthen your credit. It takes time, but even improving 50 points or so could make a big difference for your mortgage approval odds.

VA Loan Options for Bad Credit Borrowers

As a veteran or military member, you have access to several different types of VA loans—even with less-than-perfect credit.

VA Purchase Loans

The most popular type of VA loan is for buying a primary residence. Purchase loans can be used for single-family homes, townhomes, condos and in certain cases, manufactured homes. VA purchase loans don’t have a minimum credit score, but your rate will depend heavily on your credit profile.

VA Cash-Out Refinance

A VA cash-out refi lets you tap into your home equity by refinancing into a larger mortgage. You can use the funds to consolidate high-interest debts, finance home improvements, and more. Cash-out refis usually have stricter credit requirements than other VA loans.

VA Streamline Refinance

Also called an Interest Rate Reduction Refi Loan (IRRRL), VA streamlines let you refinance your current VA loan into a lower rate and/or shorter term. Streamlines typically have minimal credit requirements. If you’ve made 12 months of on-time payments on your current VA loan, you can likely qualify regardless of your score.

VA Jumbo Loans

In high-cost areas, the standard VA loan limits may be too low to buy a suitable home. A VA jumbo loan raises the limit above the conforming loan maximum so you can buy a higher-value property. Jumbo loans tend to have tougher credit standards, so poor credit can hurt your chances.

Finding a VA Lender for Bad Credit

The key to getting a VA loan with bad credit is finding lenders willing to work with lower scores. Rates will be higher than with good credit, but approval is possible in many cases.

Here are some tips for finding VA lenders that may approve borrowers with credit challenges:

• Get quotes from multiple lenders – With more options, you can compare rates and requirements
• Search specifically for “bad credit VA loans” – Some lenders promote these products
• Look for “subprime lenders” – Specialize in less-than-perfect credit
• Ask about “alternative credit qualifying” – May use non-traditional credit data
• Talk to VA-approved mortgage brokers – Can shop around on your behalf
• Look for “VA no minimum credit score” – Advertise no hard cutoff

Cast a wide net and be diligent. The lender you need is out there. Consider consulting a broker who can tap their network to find you the right fit.

Alternatives if You Don’t Qualify for VA Loan

What if you have poor credit and simply can’t get approved for a VA loan right now? You may have to go back to the drawing board and improve your credit first. But a few other options could get you into a home sooner:

FHA loan – More lenient on credit than conventional loans. Minimum 500 score.

USDA loan – For rural/suburban areas. No minimum score but typically want at least 640.

Subprime lender – Specifically cater to borrowers with credit challenges. Higher rates/fees.

FHA 203(k) rehab loan – Finance purchase and renovation of a fixer-upper home.

Lease-to-own agreement – Rent a home for 1-3 years while improving your credit.

Owner financing – Buy directly from a seller who provides mortgage financing.

Don’t give up on owning a home. With perseverance and a smart plan, you can overcome bad credit and get your VA loan approval.

Getting a VA Home Loan With Bad Credit: Final Tips

• Shop with multiple lenders to increase your chances of approval. Each lender has different requirements.

• Aim for the highest credit score possible within the subprime range—ideally at least 620.

• Be prepared to make a larger down payment. Even 5% can help offset credit risk.

• Highlight strengths in other areas like income, assets, and reserves.

• Consider credit counseling or coaching to improve your score.

• Repair any errors on your credit reports and continue paying all bills on time.

• Build positive payment history by becoming an authorized user on someone else