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 loan with lower credit scores can seem daunting. However, veterans and servicemembers may still have options even if your credit score is 550 or below. In this comprehensive guide, we’ll break down what factors determine eligibility for VA loans, how credit scores are evaluated, and steps you can take to improve your chances of qualifying if your credit needs work.
VA Loan Credit Score Requirements – What Matters Most?
When it comes to VA loans having a high credit score isn’t necessarily the deciding factor for approval. The Department of Veterans Affairs has flexible credit standards compared to conventional mortgages. VA loans are backed by the government, so lenders can take more risk on borrowers with less-than-perfect credit.
Rather than a minimum credit score the VA looks at your entire financial profile including
- Income and employment history
- Debt-to-income ratios
- Down payment amount
- Credit report details
- Compensating factors
Many lenders have their own credit score cutoffs, but ultimately it’s a holistic review. Veterans with scores around 550 have been approved when other aspects of their application were strong
Do VA Loans Allow a 550 Credit Score?
The VA itself does not set specific minimum scores for guaranteed loans. But most lenders do have baseline requirements, with many allowing scores in the 550 to 580 range.
Here are credit score ranges advertised by some top VA lenders:
- Veterans United – 620 minimum
- Navy Federal – 620 minimum
- Freedom Mortgage – 550 minimum
- USAA – 620 minimum
- Fairway Independent Mortgage – 600 minimum
Reaching out to individual lenders directly can give you the best idea of your chances with a 550 score. Underwriting requirements vary, so one provider may approve your application while another rejects it.
Factors That Help Your Chances with Lower Scores
A 550 credit score makes approval tougher, but not necessarily impossible. Several aspects of your application can help offset credit weaknesses:
Significant Down Payment: Making a larger down payment shows the lender you’re financially committed. 20% down or more gives you the strongest case with poor credit.
Low Debt-to-Income (DTI) Ratio: Keeping your total monthly debts low relative to income will help demonstrate you can manage monthly mortgage payments. Many lenders look for 36% DTI or less for VA loans.
Va Loan Residual Income Guidelines: Besides DTI, the VA also calculates residual income after your monthly obligations. Residual income helps account for family size. Higher residual income helps compensate for credit challenges.
Co-signers and Non-Occupying Co-Borrowers: Adding another person with stronger credit improves the overall creditworthiness of your application. Veterans can use co-signers and co-borrowers even when they don’t meet requirements alone.
Significant Assets: Large assets – like money in the bank – show financial stability and can help offset credit weaknesses.
Strong Rental or Job History: Consistent income sources and positive payment histories help demonstrate your reliability.
Strategies for Raising Your Credit Score
If your credit score falls below 550, taking steps to improve it can significantly help your chances of approval. Some effective strategies include:
- Pay all bills on time – late payments drag down your score.
- Pay down credit card and debt balances – high balances hurt your credit utilization ratio.
- Limit new credit applications – too many can make you look financially overextended.
- Contest errors on your credit report – mistakes can negatively impact your score.
- Consider credit counseling services – financial experts can offer personalized advice.
In time, adopting better financial habits can raise your credit score and improve not just your VA eligibility – but also your mortgage terms like interest rates. Be sure to verify your actual scores as you monitor your progress.
Alternatives if Your Credit Situation Won’t Improve
For veterans unable to raise credit scores above 550, VA loans likely pose a challenge. But you still have options, including:
- Explore mortgage lenders with alternative credit programs – some look beyond just credit scores.
- Consider FHA loans which have lower score requirements. FHA minimum scores are 580 for 3.5% down and 500 for 10% down.
- Improve your financial profile for 6-12 months and reapply – giving yourself more time to strengthen your application.
- Research down payment assistance programs in your state – some help cover down payments and closing costs.
Owning a home through a VA loan can still be possible even with less-than-ideal credit. But poorer scores make the process tougher. Improving your credit health gives you the best chance of approval on your terms. Even if you can qualify now, better credit means better mortgage rates and costs over the long run.
Are there specific VA lenders for bad credit?
Some lenders might market themselves as options for “bad credit” loans or “VA lenders for bad credit.” Take a closer look at the costs, fees and fine print in these cases. Veterans may end up paying more for being deemed a higher risk with poor credit. Improving your credit score and talking to a VA lender about your situation is highly recommended. Veterans United has a credit consulting team that can help Veterans build up their credit if their score is lower than 620.
How to Improve Your Credit Score for VA Loans
While it isnt exactly novel (or always easy), one of the best ways to improve your credit score is simply to pay your bills on time. Your payment history is the biggest factor (35%) in dictating your credit score, according to FICO.
The second-biggest factor is how much you owe (30%), so strive to keep your credit balances at or below 30% of your total credit limit. For example, if you have a $1,000 credit limit, aim to keep your balance at or below $300. The last 35% is made up of your credit history length, new credit accounts and the types of credit.
Credit monitoring software can help you identify errors in your report and keep closer tabs on your basic scores. Just know that the scores you see from apps and tools will likely differ from those of mortgage lenders. Their scores are weighted specifically for mortgage lending.
You can also get free copies of your credit report from AnnualCreditReport.com.
One thing to be leery of is businesses claiming credit repair in exchange for payment. Veterans and service members can find plenty of free resources and credit education online.
Can I Qualify For a VA Loan With Bad Credit? (VA Mortgage Updates and First Time Home Buyer Advice)
FAQ
Can I get a VA home loan with 550 credit score?
Can I use a VA loan with a 500 credit score?
What is the lowest credit score for VA?
Is it hard to get a VA loan with bad credit?
Can I still get a mortgage with 550 credit score?
With a 550 credit score, mortgage lenders may be hesitant to underwrite some loans. But it’s possible to qualify for some types of mortgages with a 550 score. Compensating factors include a low debt-to-income (DTI) ratio and a large down payment. FHA mortgages are available to eligible borrowers.
Is 540 credit score good or bad?
A 540 credit score is classified as “bad” on the standard 300-to-850 scale. It is 160 points away from being a “good” credit score, which many people use as a benchmark, and 100 points from being “fair.”
What does a 550 credit score mean?
Having a 550 score likely means you’ve had a history of poor financial habits and possibly have had your accounts sent to collections, have had judgments or have filed for bankruptcy, to name a few possibilities. In comparison, the average FICO credit score across the United States is 703—sitting in the “good” category.
Can you get a loan with credit score of 550?
You may be able to secure a personal loan with a 550 credit score. But keep in mind that you’ll have to shop around, as not all lenders will extend an offer to someone with a low credit score. Lenders that do give loans to borrowers with lower credit scores may charge higher interest rates and fees.