How to Get a VA Loan With Poor Credit

Getting a VA loan with poor credit may seem daunting, but it is possible with the right strategy and preparation. As a veteran or active duty service member, you have earned benefits like the VA home loan program that can help you become a homeowner, even with less-than-perfect credit.

In this comprehensive guide, we will walk through everything you need to know to get qualified and close on a VA mortgage loan, despite having poor credit scores.

What Credit Scores Are Considered Poor?

First, let’s clarify what is meant by “poor credit” This term is subjective, but generally refers to credit scores below 580 on the FICO model.

Here’s a breakdown of the credit score ranges

• Exceptional – 800+
• Very Good – 740-799
• Good – 670-739
• Fair – 580-669
• Poor – 579 and below

So if your scores are in the fair to poor ranges, a VA loan is still possible, but may require some extra steps.

Is a Minimum Credit Score Required for VA Loans?

This is an important point – the VA itself does not require any minimum credit score to qualify for a VA mortgage.

However, individual lenders will review your credit as part of the approval process and may have internal minimum score requirements. Often a minimum FICO score of 620 is needed, but this varies by lender.

The key is researching lenders willing to work with lower credit scores. Regional banks and credit unions may offer more flexibility than national lenders.

And remember, VA loans come with a guarantee that reimburses the lender if you default. This guarantee reduces their risk, allowing for approval of borrowers with poor credit.

Tips to Get a VA Loan with Poor Credit

If your credit scores fall below typical minimum requirements, take these steps to strengthen your VA loan application:

• Check for errors on your credit reports – Mistakes can significantly impact your scores. Review reports from Equifax, Experian and TransUnion and dispute any errors.

• Pay down balances – High credit utilization (balances relative to limits) hurts scores. Pay down cards to below 30% of the limit.

• Become an authorized user – Being added as an authorized user on a spouse or family member’s old account can add positive history.

• Limit new credit applications – Too many new accounts can raise red flags with lenders. Avoid new credit cards or loans before applying.

• Explain past issues – Documentation explaining medical issues, job loss or other circumstances that caused credit problems can help.

• Highlight compensating factors – Emphasize other positive aspects of your application, like significant savings, low debt-to-income ratio or long employment history.

With effort and a meticulous approach to these credit improvement tips, you can help offset a poor credit history and qualify for a VA home loan.

Documents Needed for a VA Loan with Poor Credit

Expect to provide extensive paperwork to prove your creditworthiness when applying for a VA loan with poor scores. Here are some common documents needed:

• Recent pay stubs proving steady income
• W-2s for the last 2 years
• Federal tax returns for 2 years
• Detailed budget showing expenses
• Bank statements for checking and savings accounts
• Certificate(s) of Eligibility proving VA entitlement
• DD214 discharge papers (if not active duty)
• Explanatory letters for past credit issues
• Documentation of compensation factors

Providing as much paper documentation as possible gives your lender greater confidence in your ability to repay the mortgage. Be thorough and proactive with your preparation.

VA Loan Requirements with Poor Credit

Beyond credit scores, the VA has a few other loan requirements to meet:

• Residual income – After paying debts and expenses, borrowers must have sufficient monthly income left over to cover living costs. The VA provides tables as a guideline for residual income based on family size and region.

• Debt-to-income (DTI) ratio – Total monthly debt payments, including the new mortgage, typically cannot exceed 41% of gross monthly income. But DTIs up to 50% may be allowed with proper justification.

• Savings/reserves – Most lenders require 1-2 months of mortgage payments saved as reserves. Buyers with poor credit may need up to 12 months reserves.

• Steady income – Stable employment and income sources are closely evaluated. Significant gaps in employment may need to be explained.

Meeting these requirements demonstrates you can manage the financial obligations of homeownership, even with poor credit.

VA Loan Eligibility with Bad Credit

In addition to credit scores and financial ratios, you must meet VA entitlement requirements:

• Minimum service requirements – Active duty service members and veterans must have at least 90 days of service during wartime or 181+ days during peacetime. Specific eligibility periods apply depending on when you served.

• Service character – Discharges under conditions other than dishonorable allow for VA loan benefits. Bad conduct discharges do not qualify.

• Surviving spouses – Unmarried surviving spouses of eligible veterans can also obtain VA home loans.

Consult with a VA lender to confirm you meet the service requirements for a VA-backed mortgage. They can also help you get supporting documentation, like your Certificate of Eligibility.

Interest Rates on VA Loans with Poor Credit

It is true your credit scores will impact the interest rate on a VA mortgage. The lower your credit score, the higher your rate is likely to be compared to buyers with good credit.

Each lender uses its own loan pricing formulas, but here are some ballpark rate ranges you can expect based on credit scores:

Credit Score	Interest Rate Range
760+	2.25% – 3.5%
700-759	2.5% – 4%
640-699	3.75% – 5.5%
580-639	5% – 7%
500-579	6.25% – 8%

Rates are also impacted by the type of VA loan, down payment, and current market rates. Government limits cap how much lenders can charge in fees and interest on VA loans.

A qualified mortgage broker can give you a more precise rate quote by assessing your full financial profile. Compare multiple lender quotes to find the best rate option.

Alternatives if Denied for a VA Loan

If you ultimately get denied for a VA loan, here are two alternatives to consider:

• FHA loan – These loans are backed by the Federal Housing Administration and offer lenient credit requirements with minimum FICO scores as low as 580. FHA loans require both mortgage insurance and down payments of at least 3.5%.

• VA lender reconsideration – Ask your broker to resubmit your application to another lender or department. Further clarification of credit circumstances or additional verification documents may lead to an approval.

With determination and the help of a good loan officer, there are almost always options to locate financing. VA loans offer the best terms but are not the only route to homeownership for those with poor credit scores.

Finding the Best VA Lender for Poor Credit

Not all lenders will be eager to approve borrowers with fair or poor credit, even with VA loan guarantees. Finding one that works with challenging credit is key.

Look for lenders that:

• Advertise VA purchase loans for “bad credit”
• Highlight low minimum score requirements
• Offer customized credit improvement programs
• Have dedicated military and VA loan divisions
• Employ VA-certified agents and loan officers

Online lenders also tend to be more flexible on credit requirements than traditional banks.

Be sure to get multiple quotes and pre-approvals. Apply with several lenders to increase your chances of approval.

Improving Credit to Reapply for a VA Loan

If your credit needs more work to qualify for a mortgage, take steps to improve your credit profile, then reapply in 6-12 months. Positive actions you can take include:

• Pay all bills on time each month
• Pay down credit card and debt balances
• Limit applications for new credit
• Have late payments or collection accounts removed
• Become an authorized user on a family member’s credit card
• Monitor credit reports and dispute any errors
• Sign up for credit monitoring services

With diligence and patience, you can boost credit scores high enough to meet VA loan requirements in the future.

Finding a Great Real Estate Agent for VA Loans

Working with a real estate agent that understands VA loans can also give you an advantage in the homebuying process. Look for an agent that:

• Has experience with veteran buyers and VA loans
• Can advise on using a VA-backed loan with poor credit
• Will help you find homes meeting VA property requirements
• Can guide you through the process and paperwork
• Has relationships with lenders familiar with VA loans

The right real estate pro by your side makes navigating the VA loan process much smoother.

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