Getting a VA Loan with Poor Credit: What You Need to Know

If you’re a military service member or veteran with less-than-perfect credit, you may be wondering if you can still qualify for a VA home loan. The good news is yes you can! VA loans are an excellent option for borrowers with poor credit because the VA is more lenient with credit requirements compared to conventional loans. In this comprehensive guide we’ll explain everything you need to know about getting approved for a VA loan with poor credit.

What Credit Score is Considered Poor for a VA Loan?

The VA itself does not set a minimum credit score requirement for eligibility. But most lenders usually look for a credit score of at least 620 to approve a VA loan. Anything below that is generally considered poor credit.

Here are the credit score ranges and their designation

• 800-850 – Exceptional
• 740-799 – Very Good
• 670-739 – Good
• 580-669 – Fair
• 500-579 – Poor
• 300-499 – Very Poor

So if your score falls in the fair to very poor ranges, you can expect some challenges getting approved for a VA mortgage. But take heart, it’s not impossible.

Factors That Impact Your VA Loan Eligibility with Poor Credit

When you apply for a VA loan with poor credit, here are some key factors lenders will evaluate:

• Your credit scores – Most lenders prefer 620+ but some may approve lower scores with strong compensating factors.

• Payment history – Lenders review your payment history in the last 12 months very closely. On-time payments help your case.

• Debt-to-income ratio – Your DTI measures your monthly debts against your income. 41% or lower is ideal.

• Compensating factors – Strengths in your application like significant assets or military benefits can offset credit weaknesses.

• Changes in credit – Recent credit improvements can help demonstrate you’ve turned over a new leaf.

While poor credit makes approval more challenging, VA guidelines provide more flexibility than conventional loans. Focus on the factors you can improve to strengthen your application.

Minimum Credit Scores for VA Loans by Lender

As mentioned above, the VA itself does not mandate a minimum credit score. But most lenders have their own credit requirements. Here are some of the more common credit score cutoffs by top VA lenders:

• Veterans United – 620 minimum
• Navy Federal Credit Union – 620 minimum
• USAA – 620 minimum
• PenFed Credit Union – 660 minimum
• Quicken Loans – 620 minimum
• Carrington Mortgage Services – 500 minimum

As you can see, actual minimum scores vary quite a bit across lenders. Carrington’s 500 score minimum shows there are options even if your credit is very poor.

Shopping around and comparing multiple lenders is key to finding the right fit for your situation.

Tips for Getting Approved for a VA Loan with Poor Credit

If your credit score is on the lower end, improving your chances of getting approved for a VA mortgage will require effort on your part. Here are some tips:

• Shop lenders that go lower – Look for lenders that advertise VA loans for “poor credit”. But read the fine print carefully.

• Improve your credit – Pay all bills on time, lower debt, and correct any errors to boost your scores.

• Increase your cash reserves – Extra assets help compensate for poor credit. Shoot for 6 months of mortgage payments saved up.

• Lower your DTI – Reduce monthly debts and housing expenses to maximize affordability. Consider a lower-priced home.

• Bring in a co-signer – Adding a co-borrower with better credit can help you qualify and get better rates.

• Explain past issues – If you have a bankruptcy or foreclosure on your record, being upfront and explaining the circumstances to your lender can help.

With some effort and persistence, service members and veterans can still achieve the dream of homeownership even with less-than-ideal credit.

VA Waiting Periods After Bankruptcy and Foreclosure

If you’ve experienced bankruptcy or foreclosure in the past, you’ll also have to contend with required waiting periods before the VA will insure a new loan.

Here are the typical seasoning periods after major credit events:

Bankruptcy:

• Chapter 7 bankruptcy – 2 year waiting period

• Chapter 13 bankruptcy – 1 year of on-time payments

Foreclosure:

• 2 year waiting period from completion date

The good news is VA waiting periods are shorter than those for conventional loans. And the lender you choose can sometimes get exceptions approved through the VA, so don’t assume you’re automatically disqualified if you’ve had a bankruptcy or foreclosure.

Using Compensating Factors to Your Advantage

Compensating factors are strengths in your financial profile that help offset weaknesses like poor credit. Since VA guidelines provide more flexibility, underwriters frequently consider compensating factors to approve borrowers with credit challenges.

Here are some examples of compensating factors that improve your chances:

• Significant liquid assets and reserves
• Additional income from disability or military benefits
• Down payment of 10% or higher
• Lower DTI and housing expenses
• Strong rental payment history
• Completed financial counseling since bankruptcy/foreclosure

The key is stacking multiple factors in your favor to present the strongest case possible to get approved for a VA loan, even with poor credit.

How Poor Credit Impacts Your VA Loan

While getting approved for a VA loan with poor credit is doable, you should expect your low credit scores to affect your mortgage. Here are some potential impacts:

• Higher interest rates – The lower your credit score, the higher interest rate lenders will charge on your loan. Ensure you can afford the monthly payment at the higher rate.

• Limited lender options – Not all lenders will approve VA loans under 620 FICO. You may have fewer lenders to choose from.

• Unable to shop for best rate – Weaker credit means less bargaining power to shop around for the very best rate. You may have to take what you can get.

• More costs for discount points – Paying discount points to buy down your rate will be more expensive. Make sure the costs make sense for your situation.

While poor credit will likely mean higher rates and costs, most borrowers can still benefit long-term from the upfront savings and unique advantages of a VA mortgage.

Alternatives if You Don’t Qualify for a VA Loan

If your credit situation is extremely challenged and you get turned down by multiple lenders for a VA loan, you may need to consider alternative options or take more time to improve your financial profile. Here are some other possibilities to explore:

• FHA loan – FHA has more flexible credit requirements than conventional loans. Minimum score is 580.

• Portfolio VA loans – Some lenders offer VA loans they keep in their own portfolio. This provides more flexibility.

• VA-backed second mortgage – Combining a first mortgage with a VA Home Loan Guaranty can help borrowers with very poor credit.

• Improve credit first – Build your credit for 6-12 months through credit counseling before reapplying.

• Co-signer – Adding a co-borrower with stronger credit can help you qualify if your credit is very poor.

• Rent – If your credit needs substantial improvement, keep renting and work on your scores for at least a year before trying to buy.

Don’t get too discouraged if your first VA loan application is denied. With effort and perseverance, service members and veterans can get on the path to homeownership even with poor credit.

Summing It Up

Getting a VA mortgage with poor credit scores below 620 is challenging but certainly possible. Every situation is different. Focus on putting your best foot forward by maximizing compensating factors, improving your credit, and shopping lenders. With flexibility and persistence, you can achieve the dream of homeownership through a VA loan even with bruised credit.