Veterans and service members may have whats considered “poor” or “bad” credit and wonder if they can still use their VA home loan benefit. It’s important to understand the VA doesnt set credit score requirements. In fact, the VA doesnt mandate a minimum credit score at all.
The ability to obtain a VA loan with bad credit is determined by the specific credit requirements of each individual VA lender. Let’s take a closer look at how lenders may assess your poor credit and risk when applying for a VA loan.
Getting approved for a VA home loan when you have bad credit may seem daunting, but it is possible for many veterans and service members. As one of the nation’s top VA lenders, we want to help explain how VA loans work for borrowers with poor credit so you can evaluate your options and take steps toward homeownership.
At our company we know having less-than-perfect credit doesn’t have to be a perpetual barrier to buying a home with your VA benefits. This guide will cover
- What credit scores fall into the “bad credit” range
- Tips for improving your credit score
- How lenders assess borrowers with lower scores
- Steps to take if you have a recent bankruptcy or foreclosure
- Options to get on the path to VA loan approval
What Constitutes a Bad Credit Score?
First it helps to define what is generally considered “bad credit” when applying for a mortgage. The FICO credit scoring model categorizes scores as follows
- 800-850 = Exceptional
- 740-799 = Very Good
- 670-739 = Good
- 580-669 = Fair
- Under 579 = Very Poor
FICO scores under 580 are what most lenders would consider bad credit. This shows a history of missed payments, collections accounts, bankruptcies or other negative factors. While the VA itself doesn’t mandate borrowers have good credit, lenders typically want to see scores of at least 620.
Some lenders may approve VA loans with credit scores below 620 but it’s less common. Expect to receive higher interest rates as lenders view you as a higher credit risk.
Tips to Improve Your Credit Score
Improving your credit score takes time and diligent effort, but it can be done. Here are some tips:
- Pay all your bills on time each month
- Pay down balances so they are below 30% of your credit limit
- Avoid opening too many new credit accounts
- Address any errors on your credit report
- Consider consolidating high-interest debt
You can also monitor your credit for free so you can track progress. Having a solid 12-18 months of positive payment history can significantly boost your score.
How Lenders Assess Lower Credit Scores
The VA doesn’t impose a minimum credit score, but most lenders want to see FICO scores of at least 620. Some may approve loans for borrowers with scores in the high 500s, but additional scrutiny is required.
Along with your credit score, lenders look at debt-to-income ratio, assets, compensation, residual income and other factors to gauge your ability to repay the loan. Strong compensating factors can sometimes offset a poor credit score.
For borrowers with bad credit, expect lenders to ask for:
- Large down payments
- Proof of sufficient assets
- Lower debt-to-income ratios
Higher VA funding fees also apply for borrowers with credit scores below 620.
Waiting Periods After Bankruptcy and Foreclosure
If you’ve had a bankruptcy, foreclosure, short sale or other major credit event, mandatory waiting periods apply before getting VA-approved.
For FHA loans, you must wait 3 years after a foreclosure. For VA loans, the foreclosure waiting period is only 2 years. Bankruptcy waiting periods are 2 years for a Chapter 7 and 1 year for Chapter 13 with a VA loan.
Meeting these waiting periods doesn’t guarantee approval. Having poor credit scores after a negative credit event can complicate the approval process. Talk to a lender about credit rebuilding options.
What if My Score is in the 500s? Start With Credit Counseling
If your credit score is very low and you have a recent foreclosure or bankruptcy, a good first step is to connect with a credit counseling agency. Here at our company, we provide:
- Free credit analysis
- Personalized credit rebuilding plans
- Ongoing score monitoring
- Financial coaching
Credit counseling can help you identify areas needing improvement. Creating a customized plan tailored to your situation is key to boosting your score.
It also helps to understand the specific reasons your score is low, according to your credit report. Missed payments, collections and other negative factors dragging your score down can gradually be offset with diligent credit management.
Counseling services map out action steps so you can eventually meet a lender’s credit standards, including:
- Paying down balances
- Disputing errors
- Managing debt
- Increasing credit limits
- Avoiding new inquiries
Partner With a VA Lender to Achieve Your Goals
Achieving your homeownership dreams is possible even if you have bad credit today. The expert VA lenders here at our company want to help you evaluate your situation and take proactive steps to strengthen your credit.
We offer:
- Free credit analysis
- Credit improvement plans
- Ongoing support on your path to homeownership
In most cases, VA borrowers can get approved once their credit profile meets our minimum standards. We can help you identify target timelines based on your current scores.
Whether you’re starting from 500 or already in the 600s, our credit experts provide the coaching needed to help improve your profile. We see VA loans for borrowers with bad credit as an opportunity, not an obstacle. Let us help you write your success story!
Does a lower credit score affect your VA closing costs?
Your credit score may affect closing costs if you purchase discount points. If your poor credit leads to an increased interest rate, considering discount points to decrease the rate might be a good idea. Rolling points into a VA loan for a new home purchase is not permitted, so you would need to have cash on hand to cover these costs during the closing process.
Does a lower credit score affect your VA loan interest rate?
A lower credit score can have an impact on the interest rate lenders quote. Lenders typically view higher credit scores as indicative of lower risk, often leading to more favorable interest rates. Therefore, lower scores may result in higher rates. Generally, the impact of your credit score on your rate is more pronounced with conventional mortgages than VA loans.
BUYER BEWARE: VA Home Loans with Bad Credit
FAQ
Can you get a VA loan with a 500 credit score?
Is it hard to get a VA loan with bad credit?
Can a veteran with bad credit get a mortgage?
Can you get a VA loan with a credit score of 580?
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.