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 is an exciting milestone in life. However, having bad credit can make it more difficult to get approved for a mortgage. If you’re a veteran or service member with less-than-perfect credit you may be wondering if VA loans are still an option.
The good news is, yes! You can get a VA home loan even with bad credit. VA loans are structured to help military borrowers and have more lenient credit guidelines than conventional mortgages.
In this comprehensive guide, we’ll cover everything you need to know about getting a VA mortgage with bad credit, including:
- What credit scores qualify as “bad”
- VA credit requirements
- Tips for improving your credit
- Types of VA loans available
- How to find the best VA lender
Let’s dive in!
What Credit Score is Considered Bad for VA Loans?
The VA itself doesn’t set a minimum credit score requirement for its home loans. Rather, individual lenders establish their own credit standards when underwriting VA mortgages.
So what exactly constitutes “bad credit” for VA lending purposes? Here’s a quick rundown:
- Credit scores below 620 are generally considered poor or bad credit
- Many lenders look for minimum scores around 600
- Some lenders may approve borrowers with scores as low as 500
The most important factor is not necessarily your score, but your payment history over the last 12 months. As long as you have a solid record of paying bills on time recently, many lenders are willing to work with lower credit scores.
VA Credit Requirements are Flexible
One major advantage of VA loans is their inherent flexibility when it comes to credit. The VA understands that service members face unique financial circumstances and encourages lenders to take a holistic look at applicants.
Here are some of the ways VA loans accommodate borrowers with poor credit:
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No set minimum credit score – The lack of an official minimum score set by the VA gives you more options to find a lender.
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Shorter waiting periods after bankruptcy/foreclosure – Following major credit events, VA borrowers can qualify much faster than with conventional mortgages.
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Alternative credit documentation – Lenders can review your rental, utilities, or insurance payment histories if you lack enough credit accounts.
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Compensating factors – Strong aspects in other areas of your finances can offset weaknesses like low scores. For example, significant assets or long-term employment.
While VA requirements are flexible, we still recommend taking steps to improve your credit before applying. Higher scores qualify you for better loan terms.
5 Tips for Improving Your Credit Score Quickly
Though bad credit doesn’t automatically disqualify you from a VA loan, taking some actions to boost your score can really pay off. Here are some tips for credit improvement:
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Pay all bills on time – Payment history makes up a major part of your credit score. Set up autopay or reminders to avoid late payments.
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Pay down balances – Keep credit utilization low by paying down balances as much as possible. Shoot for 30% or less of your total limits.
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Limit new credit inquiries – Each new application causes a hard inquiry that dings your score temporarily. Only apply for what you need.
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Check for errors – Incorrect information on your credit reports can drag down your scores. Dispute any errors you find.
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Become an authorized user – Ask a family member with good credit to add you as a user on their credit card. It can give your score a boost.
With some diligent credit repair work, you can significantly improve your scores within 6-12 months.
Types of VA Loans Available for Bad Credit Borrowers
Veterans and service members with poor credit still have multiple options when it comes to VA mortgage products. Here are some of the most common:
VA Purchase Loans
A VA purchase loan allows you to buy a home with no down payment required. Closing costs can also be rolled into the loan amount. Having a lower credit score mainly affects the interest rate you’ll qualify for.
VA Cash-Out Refinance
This type of VA refinance converts your home equity into cash you can use for any purpose. While credit score minimums may be higher than purchase loans, it’s still possible to qualify with bad credit.
VA Streamline Refinance
Also called an IRRRL, this is the easiest VA refinance option. There’s limited documentation required and no appraisal or credit check. As long as you’ve made 6-12 months of on-time mortgage payments, you can likely get approved regardless of your score.
How to Find the Best VA Lender for Bad Credit
Not all lenders are created equal when it comes to accommodating applicants with poor credit. Here are a few tips for finding one that offers the most advantages:
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Shop around – Compare quotes from multiple lenders to find the most favorable terms your credit qualifies for.
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Ask about exceptions – See if the lender is willing to make exceptions to their usual credit policies for your situation.
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Look for credit repair help – Some lenders offer complimentary credit consulting services to help you improve your scores.
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Read reviews – Look for first-hand reviews praising a lender’s bad credit programs and customer service.
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Compare fees – Make sure the lender doesn’t charge excessive fees to offset lending to higher-risk borrowers.
Finding the right lender can make all the difference in getting your VA loan approved and ensuring the best possible rate.
Ready to Apply for a VA Loan?
The key takeaways are:
- Scores below 620 are generally considered bad credit
- VA guidelines are flexible for low scores
- Compensating factors can help you qualify
- Certain VA loans are easier to get with bad credit
- Shopping around for the right lender is crucial
With persistence and the right approach, getting VA home loan approval with bad credit is absolutely achievable. Don’t get discouraged!
Are you ready to start the pre-approval process? Our dedicated VA mortgage specialists are standing by to help you evaluate your options and take the next steps toward your dream home. Give us a call today!
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.
Here’s when VA loan requirements may be flexible
The VA encourages lenders to evaluate each borrower’s situation individually, which means most VA loan requirements are flexible.
One way you can help your case is by presenting what are called compensating factors. These are strong aspects of your financial situation that help counterbalance any weak points in your application and include:
- Excellent credit history
- Conservative use of consumer credit
- Minimal consumer debt
- Long-term employment
- Significant liquid assets
- Sizable down payment
- High residual income
- Low DTI ratio
- Holding home equity (for refinance loans)
- Little or no increase in housing-related expenses over time
- Receipt of military benefits
- Receipt of tax credits for child care
- Receipt of tax benefits for home ownership
Can I Qualify For a VA Loan With Bad Credit? (VA Mortgage Updates and First Time Home Buyer Advice)
FAQ
Can you get a VA loan with a 500 credit score?
Can a veteran with bad credit get a mortgage?
Can I get a VA loan with a credit score of 580?
Is there a credit minimum for VA loan?
Are VA home loans available for bad credit?
It is possible to get a VA loan with bad credit. In fact, there is technically no minimum credit score requirement enforced by the VA. That doesn’t mean your credit is irrelevant, however. As said above, most VA-approved lenders prefer a credit score of at least 620, but you might be able to find lenders with lower minimum guidelines.
What factors can affect the interest rate charged on a VA loan with bad credit?
Your credit score can have an impact on the interest rate that lenders quote. Generally, though, the impact of credit scores on rate is more pronounced with conventional mortgages than with VA loans. Like credit score minimums, rates will differ among lenders. Are there specific VA lenders for bad credit?
Are there any VA lenders who will accept a FICO score of 580?
Some VA lenders might be fine with a 580 FICO score. Others will want to see something higher. The key is understanding this isn’t a one-score-fits-all kind of thing.
What is the minimum FICO score required for a VA loan?
Across the spectrum of VA lending, a 620 FICO score is a common credit score minimum. But that benchmark can be higher or lower depending on the lender, the economic environment, how much you’re hoping to borrow and more. Some VA lenders might be fine with a 580 FICO score. Others will want to see something higher.