Getting a VA Loan With Bad Credit: A Complete Guide

Getting a mortgage loan with bad credit can seem daunting. But if you’re a military servicemember or veteran, a VA loan may provide a path to homeownership even with less-than-perfect credit

VA loans are backed by the Department of Veterans Affairs and come with several distinct advantages for borrowers with low credit scores or past credit troubles. Most notably the VA doesn’t set a minimum credit score requirement for eligibility. This gives veterans and military members more financing flexibility versus conventional loans or FHA mortgages.

In this comprehensive guide, we’ll cover everything you need to know about getting approved for a VA loan with bad credit

What Credit Score is Considered Bad for a VA Loan?

The VA leaves it up to individual lenders to establish their own credit standards and determine what credit scores they’ll accept. So there’s no universal definition of what constitutes “bad” credit for VA loans.

That said, many lenders generally view credit scores below 620 as poor or bad credit. Across the lending industry, a score of 580 or lower is widely seen as very poor credit.

But again, credit standards can vary quite a bit by lender. Here are a few examples:

• Veterans United requires a minimum score of 620 for most borrowers. But they’ll work with veterans to improve their credit even if it’s below that threshold.

• Carrington Mortgage accepts VA loan applicants with credit scores as low as 500.

• Rocket Mortgage, a top VA lender, sets its minimum credit bar at 580.

So while a 500 or lower credit score is considered bad, it doesn’t automatically disqualify you from getting a VA-backed mortgage. You may just need to shop around for a lender willing to work with your situation.

Factors That Impact Bad Credit VA Loan Eligibility

When assessing a VA loan application with poor credit, lenders will look at more than just your credit scores. Here are some other factors that come into play:

Payment History: The VA requires lenders to examine your payment record over the previous 12 months. Timely payments on housing, auto, and other bills can help offset credit score concerns.

Compensating Factors: Strengths in other parts of your financial profile, like significant assets or a lower debt-to-income ratio, may compensate for bad credit.

Previous Bankruptcies or Foreclosures: You’ll face restrictions if you’ve declared bankruptcy or gone through foreclosure in the recent past. But VA guidelines are more lenient than conventional mortgages.

Outstanding Federal Debt: Lenders will check databases for any defaulted federal obligations, including prior FHA, VA, or USDA loans.

Residual Income: The VA looks at your income remaining after paying debts and living expenses. Higher residual income can make up for poor credit.

Down Payment: While VA loans don’t require a down payment, coming up with one shows commitment and can improve your chances with bad credit.

Waiting Periods for Bad Credit VA Loans

If your credit woes stem from a past bankruptcy or foreclosure, you’ll have to meet certain waiting period requirements before the VA will back a new mortgage.

Here are the typical seasoning periods for bad credit VA loans:

• Bankruptcy: 2 years after Chapter 7 discharge; 1 year after Chapter 13 discharge.

• Foreclosure: 2 years from the date of foreclosure completion.

The bright spot is that VA waiting times are shorter than what conventional loans allow – often by 1-2 years. And the VA may grant exceptions in certain cases based on your circumstances.

Improving Your Credit for VA Loan Approval

If your credit score falls below most lenders’ requirements, taking steps to improve it can really pay off.

Here are some effective ways to boost your credit and get it VA loan-ready:

• Pay all your bills on time each month
• Pay down balances on credit cards and other revolving debt
• Limit new credit inquiries by only applying for what you need
• Correct any errors on your credit reports
• Enroll in credit monitoring to stay on top of your scores
• Talk to a credit counselor if you need help getting on track

With diligence and commitment to positive credit habits, you may be able to raise your scores enough in 6 months or a year to meet more lenders’ requirements and qualify for better VA loan rates.

Types of VA Loans Available for Bad Credit

VA loans come in different varieties, each with their own unique benefits. Even with poor credit, you may be eligible for some of the most popular VA loan options:

VA Purchase Loan

The VA purchase loan helps veterans and military buyers finance a home while requiring no down payment or private mortgage insurance. It’s the most common type of VA loan.

VA Cash-Out Refinance

This allows you to tap your home’s equity by refinancing into a larger mortgage amount. The extra cash can be used to consolidate high-interest debt, finance home improvements, or cover other costs.

VA Streamline Refinance

Also called an IRRRL, this refinance type helps you lower your interest rate and payments by refinancing your current VA loan into a new one. Limited documentation and underwriting make it one of the easiest VA loans to qualify for.

VA Loan Credit Requirements: Flexible Guidelines

Unlike conventional mortgages and FHA loans, the VA does not prescribe fixed credit standards lenders must follow. This grants lenders wide latitude when underwriting borrowers with bad credit.

Below are some key areas where VA guidelines remain flexible for low credit applicants:

• No minimum credit score – While lenders may impose score requirements, the VA itself doesn’t dictate one.

• Higher debt-to-income (DTI) allowed – VA borrowers can qualify with DTIs above 41% by meeting “compensating factors.”

• Individual compensation for low residual income – VA underwriters have discretion to allow exceptions to residual income requirements.

• Shorter waiting periods after bankruptcy/foreclosure – VA imposes shorter seasoning timeframes than conventional loans.

• Flexibility for outstanding federal debts – Applicants aren’t automatically disqualified based on CAIVRS database checks.

How to Get Approved for a VA Loan with Bad Credit

While every situation is different, here are some steps that can help your chances of getting a VA home loan with poor credit:

• Shop multiple lenders – Compare quotes from lenders with low credit score requirements.

• Review your credit reports – Dispute any errors dragging your scores down.

• Highlight compensating factors – Emphasize strengths like solid income, low debts, and home equity.

• Explain past credit issues – Provide context on why your credit faltered and how you’ve addressed problems.

• Consider a co-signer or guarantor – Adding a co-borrower with better credit may help you qualify and get better rates.

• Make a down payment if possible – Even a small down payment can offset credit risk.

• Ask lenders to reconsider your application – Appeal any initial denials and provide additional documentation if needed.

With perseverance and a willingness to shop around, servicemembers and veterans can still achieve the dream of homeownership through VA loans despite having poor credit.

FAQs About VA Loans for Bad Credit

Can I get a VA loan with a 500 credit score?

It may be challenging, but yes – some lenders like Carrington accept VA applicants with credit scores as low as 500. Each lender has their own underwriting standards, so it pays to cast a wide net.

Will a lower score increase my VA loan rate?

In most cases, yes. Because lower scores equate to higher risk, lenders will price that risk into your interest rate. However, government-guaranteed VA loans are less rate-sensitive than conventional mortgages.

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

It depends on your situation, but typically 12-24 months of diligent credit management can increase your scores enough to meet more lenders’ requirements. Correcting report errors gives an instant boost.

Can I get a VA IRRRL refinance with bad credit?

Yes. VA guidelines allow lenders to approve IRRRL refinances without assessing your credit or income as long as you have a good payment history on the current VA loan being refinanced.

Are there VA lenders just for bad credit borrowers?

Some lenders advertise VA loans for “bad credit,” but read the fine print carefully. Stick to reputable lenders; working to improve your credit yourself is a better approach.

The Bottom Line

A VA loan can be a lifeline for servicemembers with damaged credit who want to buy a home. Thanks to the VA’s flexible credit guidelines, you can often qualify when conventional financing is out of reach.

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