VA Home Loans for Bad Credit: A Guide to Qualifying With Low Credit Scores

As a loan officer who specializes in VA home loans I often work with veterans and service members who have less than perfect credit. Many assume that bad credit automatically disqualifies them from using their VA loan benefit. But that’s not always the case.

In this comprehensive guide, I’ll explain how VA home loans work for borrowers with bad credit, what credit scores lenders look for, how to improve your credit, and tips for getting approved even with credit challenges

What is Considered Bad Credit for VA Loans?

First, let’s clarify what constitutes “bad” credit when it comes to VA loan underwriting. The VA itself does not set specific credit score requirements or thresholds. However, most lenders do have their own minimum credit standards borrowers must meet.

Here’s a quick guide to how credit scores are generally assessed:

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

FICO scores of 620 or higher are usually preferred for VA loan approval So credit in the “fair” and “poor” ranges could potentially lead to challenges qualifying for a VA mortgage

However, just because your credit is less than ideal doesn’t mean you’ll automatically be denied. Keep reading to learn how lenders evaluate VA loans for borrowers with bad credit.

Can You Get a VA Loan With Bad Credit?

The short answer is yes – you can potentially get a VA-backed home loan even with poor credit.

Since the VA itself does not impose any minimum credit score requirements, an individual lender reviews your full credit profile and weighs additional factors before making a decision.

Each lender has their own credit policies and standards for VA loans. I generally recommend looking for lenders that offer:

• Minimum scores of 600 – While some lenders require 620 or 640 credit scores, those with minimums at 600 or below are more flexible for borrowers with credit challenges.

• Alternative credit review – Many lenders go beyond just looking at your FICO score alone. They holistically review your entire credit history, which can help offset a low score.

• Credit consultation – Look for lenders that provide guidance on improving your credit. They want you to ultimately qualify, so reputable lenders will help you create a plan to boost your credit health over time if it’s below their standards today.

In addition to your credit score, lenders evaluate your entire financial picture including your debt-to-income ratio, assets, down payment, military benefits, and more. We’ll dig into these “compensating factors” that can help you get approved later in this article.

VA Loan Requirements with Bad Credit

While the VA doesn’t impose credit requirements, you do need to meet the administration’s basic eligibility criteria. Here are the key considerations:

Service Requirements

You must have at least 90 days of active duty service to qualify for a VA loan if you served during wartime, or 181+ days during peacetime. Check online for details about eligible service periods.

VA Entitlement

You need available VA entitlement, which refers to the amount of your VA home loan benefit you can utilize. This is typically $36,000, though entitlement can vary. You can have used VA loans before but need to have remaining entitlement.

Occupancy Requirements

VA loans are typically for primary residences where you’ll live full-time. Some lenders allow VA loans for second homes or investment properties. But requirements are usually stricter for these scenarios.

Income & Financial Stability

Lenders want to see you have steady income that covers your living expenses, debts, and proposed mortgage payment. Specific income documentation and debt-to-income ratio requirements vary by lender.

Down Payment Not Required

Unlike conventional loans, the VA does not require any down payment. But lenders sometimes ask for one if you have significant credit issues.

As long as you meet the above core VA requirements, your credit score alone will not automatically disqualify you from using your earned home loan benefit.

Tips for Getting Approved for a VA Loan With Bad Credit

If your credit score falls in the fair or poor ranges, here are some tips that can help you get approved for a VA mortgage:

Shop multiple lenders – Work with several lenders to compare credit requirements and interest rates. Approval odds and loan costs can vary significantly between different companies.

Provide credit explanations – Lenders may ask you to write letters explaining negative marks or collections on your credit report. Detail what happened and steps you’ve taken to improve your finances.

Make a down payment if possible – While the VA doesn’t require a down payment, lenders sometimes ask for one with credit challenges. At least 5-10% down shows commitment.

Have ample cash reserves – Lenders look for six months to a year of mortgage payments available in checking/savings to cover emergencies if you have bad credit.

Get a co-signer – Adding a co-signer with better credit can give lenders more confidence. Make sure the co-signer understands they are equally responsible for the loan.

Improve your credit – If your score is very low, taking some time to boost your credit can really help your chances before applying.

With a proactive approach and smart preparation, you can potentially get approved for a VA home loan even with less than stellar credit.

VA Loan Credit Score Needs by Lender

To give you a better idea of what credit scores different lenders prefer for VA loan approval, here is an overview of minimum FICO scores for some top national VA mortgage companies:

• Veterans United – 620 minimum FICO score
• Navy Federal – 620 minimum FICO score
• USAA – 620 minimum FICO score
• Quicken Loans – 600 minimum FICO score
• New American Funding – 600 minimum FICO score

These minimums can vary by region, loan program, debt-to-income ratio, and other factors. Be sure to ask loan officers about the complete credit requirements for your situation.

Lenders that advertise VA loans for “bad credit” may approve scores in the 500s. But watch out for very high interest rates or excessive fees if your credit is poor. Taking time to improve your credit first may get you better loan offers.

Factors That Offset Bad Credit for VA Loans

To approve borrowers with fair or poor credit scores, VA lenders look for positive “compensating factors” in other areas of your financial profile:

Low Debt-to-Income Ratio – Your DTI compares your monthly debts to income. Ratios below 41% can help counteract bad credit.

Significant Down Payment – Lenders view larger down payments (10-20%+) as indication you’re financially committed.

High Residual Income – Residual income shows your money left over each month after paying bills. The higher the better if you have bad credit.

Large Cash Reserves – Robust savings and checking account balances prove you can cover mortgage payments if money gets tight. Shoot for 6-12 months of reserves.

Strong Rental Payment History – Prompt rental payments help demonstrate you manage financial obligations responsibly if you have limited credit accounts.

Military Disability Pay – This steady income stream can provide reassurance even if your credit is poor.

VA Residual Income Tables – You may meet “acceptable” guidelines per the VA’s tables even with bad credit.

Stable Employment – Long job history in the same career or field shows reliability that helps compensate for low credit scores.

Previous Homeownership Experience – Past experience owning a home responsibly before a financial hardship shows you understand obligations of homeownership.

Education & Occupation – In some cases, an educated professional career field can help strengthen a VA loan application with poor credit.

While your credit score is important, lenders take a holistic look at your situation. Having strengths across these other areas can get you approved for a VA home loan even with fair or bad credit.

How to Improve Your Credit for VA Loan Approval

The very best way to improve your odds of VA loan approval is to take steps to boost your credit score before applying. Here are smart tips for improving your credit:

• Pay all bills on time – Payment history has the biggest impact on your scores. Set reminders to help stay on track.

• Pay down balances – Letting credit card and revolving balances pile up drags down credit. Pay down to below 30% of limits.

• Limit new credit requests – Each application causes an inquiry that can ding your scores temporarily. Only apply for needed new credit.

• Check reports for errors – Incorrect late payments or outdated collections can unfairly lower your credit. Dispute inaccuracies.

• Sign up for credit monitoring – Use a free service like Credit Karma to monitor your credit movement and get alerts for suspicious activity.

• Consider credit counseling – Reputable non-profit credit counseling services can give unbiased advice on improving your credit.

• Practice good financial habits – Making on-time payments, limiting debts, and budgeting helps credit while also setting you up for mortgage success.

With diligence and attentive credit management, you can boost scores significantly in under a year. Taking the time to improve your credit before applying for a VA loan gives you the best chance at quick approval with ideal rates.

What’s Next? Get Started on Your VA Loan

My best advice is to be proactive. Talk to lenders, get your full credit picture, start improving your scores right away, and highlight other strengths in your financial profile beyond just your credit. With persistence and a smart approach, you can overcome credit difficulties and join the thousands of buyers that achieve the dream of homeownership with a VA loan each year.

To explore your options, I recommend starting pre-qualification for a VA loan today. Connect with an experienced VA mortgage expert who can review your complete situation and help map out the smartest path forward based on your credit needs.