Getting a VA Home Loan With Bad Credit: What You Need to Know

Purchasing a home is a major financial commitment that can be challenging for anyone, but especially difficult for veterans and military families with less-than-perfect credit. Fortunately, VA home loans make homeownership possible even with a poor credit score This guide explains everything you need to know about qualifying for and getting a VA mortgage with bad credit

What is a VA Home Loan?

VA home loans are mortgage loans guaranteed by the Department of Veterans Affairs They allow eligible borrowers to purchase a home with little or no down payment and flexible credit requirements

Key features of VA loans include:

• Available to veterans, active duty military, reservists, and qualifying spouses
• Requires little or no down payment
• No monthly mortgage insurance premiums
• Competitive interest rates
• Can be used to purchase, build, remodel or refinance a home

The VA does not directly make loans. Instead, it provides lenders with a guarantee that protects them from loss if the borrower defaults. This allows lenders to offer more flexible terms to borrowers who may not qualify for conventional mortgages.

VA Loan Credit Score Requirements

The VA itself does not have a minimum credit score requirement for eligibility. However, individual lenders set their own credit standards when underwriting VA loans.

Here are some average VA loan credit score requirements among top lenders:

• Minimum FICO score of 620
• Preferred FICO score of 660+

So while the VA won’t exclude you based on your credit alone, lenders look closely at your credit profile to assess your ability to repay the loan. The higher your score, the better your chances of approval and lower interest rates.

Getting a VA Loan With Bad Credit

Bad credit is generally considered a FICO score below 620. This makes getting approved more challenging, but not impossible with a VA loan.

Here are some tips for getting a VA mortgage with poor credit:

• Shop around. Compare quotes from multiple lenders as credit standards vary. Find those willing to work with lower scores.

• Improve your credit. Pay down debts, dispute errors on your credit reports and maintain on-time payments. Even small score improvements can help.

• Make a larger down payment. Putting 10-20% down shows lenders you’re financially committed.

• Find a co-signer. Adding a co-signer with better credit can help you qualify and get better rates.

• Explain past issues. Provide documentation explaining any past credit problems.

While poor credit makes approval harder, the VA guarantee offers more flexibility than conventional loans. With some effort, Veterans can still achieve homeownership goals despite past credit challenges.

Factors Besides Your Credit Score

When reviewing a VA loan application, lenders look at more than just your credit score. Other aspects of your financial profile also weigh into the decision.

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) compares your total monthly debt payments to your gross monthly income. Most lenders prefer a DTI of 41% or less for VA loans. A higher DTI raises concerns about your ability to handle the new mortgage payment.

Down Payment Amount

The VA doesn’t require a down payment. But lenders often prefer you put at least 5-10% down with poor credit. The larger the down payment, the lower the risk to the lender.

Employment History

Stable employment and income sources help reassure lenders of your ability to repay the loan long-term. Provide documentation like pay stubs, tax returns and W-2s.

Reserves and Savings

Substantial reserves and savings help compensate for past credit issues. Lenders often want to see three months’ mortgage payments available in reserves.

VA Residual Income

The VA considers your “residual” income left each month after paying debts and expenses. Their guidelines help assess if you can afford a mortgage payment.

Improving Your VA Loan Eligibility

Here are some tips for veterans and military families to improve chances of getting approved for a VA home loan:

• Pay down credit card balances – Reducing revolving debt improves your credit utilization ratio.

• Prioritize on-time payments – Set up autopay and calendar reminders for all bills.

• Limit new credit inquiries – Too many new applications in a short timeframe raises red flags.

• Pay off collections and charge-offs – Consider negotiating pay-for-delete agreements.

• Monitor your credit reports – Stay on top of your reports and immediately dispute any errors.

• Sign up for credit monitoring – Use a program to track your FICO scores and activity.

• Hold off on major purchases – Delay big-ticket items until after closing on your home.

With some time and effort, Veterans can position themselves to qualify for a VA mortgage and enjoy the benefits of homeownership.

Alternative Loan Options

If your credit situation makes getting a VA loan difficult, even with a larger down payment or co-signer, here are two other programs military homebuyers can consider:

FHA loans – Popular with first-time homebuyers, FHA loans offer low down payments and more flexible credit than conventional mortgages. Minimum FICO scores start around 580.

USDA loans – For properties in rural/suburban areas, USDA guaranteed loans require no down payment and have flexible credit standards like VA loans.

VA loans remain a top choice thanks to their zero down payment options, lower rates and access to military-exclusive features. But FHA and USDA loans provide viable alternatives if VA loan qualifications prove challenging.

The Bottom Line

The VA home loan program provides a path to homeownership for veterans, military members and families even with less-than-perfect credit. While getting approved with poor credit scores takes some extra effort, it is possible with the right VA lender. Be ready to make a larger down payment, find a co-signer or take steps to improve your credit. With perseverance, you can still achieve the dream of homeownership.