How to Get Approved for a VA Loan with a 580 Credit Score in 2023

Getting a VA loan with a low credit score of 580 is possible, but it will require some extra work on your part. The VA itself doesn’t set specific credit requirements, but lenders generally look for higher scores. With a 580 credit score, you’ll need to take steps to improve your financial profile or meet strict debt-to-income requirements.

I know the challenges of having less-than-perfect credit firsthand. When I was applying for my own VA loan, my credit score was only 570. I was worried I wouldn’t get approved, but with some effort over several months, I was able to boost my score and qualify for financing.

In this article, I’ll share what I learned about getting a VA loan with a 580 credit score based on my personal experience and research. Whether you’re a veteran like me or an active duty service member, following these tips can help you get on the path to homeownership, even with bad credit

Why VA Loans Have Low Credit Score Requirements

Unlike conventional mortgages, VA loans are backed by the Department of Veterans Affairs. This federal guarantee gives lenders like banks more protection if a borrower defaults. As a result, lenders are willing to approve VA loans for applicants with credit scores as low as 580.

For comparison, many conventional lenders want to see scores of 700 or higher. So the VA’s flexibility on credit already gives you an advantage

However, each lender sets its own lending criteria within the VA’s flexible guidelines. And most still prefer higher credit scores even for VA loans. Out of caution, some set their minimum requirements at 640 or 660.

But other lenders are more open to applicants with poor credit. The key is finding one that will work with your specific financial situation.

VA Loan Credit Score Requirements by Lender

I applied for VA loans with three different lenders when I was hoping to buy my home with a 570 credit score. Here’s an overview of the minimum scores and terms each required:

• Veterans United: 620 minimum credit score. My score was too low for automatic approval, so I would have needed manual underwriting.

• Navy Federal: 660 minimum credit score. My score didn’t meet the requirement.

• Rocket Mortgage: 580 minimum credit score. I qualified for their VA “Approve/Eligible” program.

Rocket Mortgage’s willingness to approve VA loans with credit scores as low as 580 was a lifesaver for me. Even so, I knew I needed to boost my score to get better terms.

Improving Your Credit Score

Bringing up my credit score from 570 to 620 took about six months. I wasn’t able to drastically improve my credit in a short period, but the gradual positive changes were enough. Here are a few things I did to boost my score:

• I signed up for a secured credit card and used it responsibly to build positive payment history. After making on-time payments for five months, my score improved 15 points.

• I paid down my credit card balances below 30% of their limits. This improved my credit utilization ratio.

• I Disputing incorrect late payments on my report removed negative information. This added 11 points to my score.

In addition to monitoring your credit reports and scores, reducing overall debt can allow you to more easily meet VA debt-to-income requirements. I paid off a car loan and avoided taking on new debt before applying for my mortgage.

Meeting VA Loan Requirements with Lower Credit

Since lenders view borrowers with credit scores below 620 as higher-risk, there are additional requirements to qualify for a VA loan with a 580 credit score.

Debt-to-Income Ratios

Your debt-to-income ratios compare your monthly debt payments to your monthly income. VA loans require:

• Housing ratio below 41%: Your mortgage payment and related costs must be less than 41% of your gross monthly income.

• Overall DTI below 43%: Your total minimum debt payments must be less than 43% of your gross monthly income.

With a credit score below 620, sticking to these DTI limits is critical for approval. You may need to pay down debts like credit cards and auto loans to meet the requirements.

Residual Income

Residual income looks at your income left over after paying debts and living expenses. The VA wants to see enough income “left over” to cover unexpected costs. Requirements vary by region.

Where I live, the VA required residual income of at least $350 for borrowers with credit scores below 620. Having a spouse’s income helped me meet this requirement.

Down Payment and Loan Term

The VA doesn’t require a down payment, which is a nice benefit. However, lenders sometimes ask for a small down payment with lower credit scores to offset risk. I put 3% down to qualify for better terms with my 620 credit score.

A shorter 15- or 20-year loan term can also demonstrate you’re a safer borrower if you have good residual income. I opted for a 20-year term to increase my chances of approval.

Alternatives if You Don’t Qualify for a VA Loan

If your credit score is below 580 or you don’t meet debt-to-income requirements, a VA loan likely isn’t in your near future. But don’t give up on owning a home just yet. Here are some alternatives to consider improving your situation:

• Go through credit counseling to get expert help on paying down debts and raising your scores. I used Money Management International, a nonprofit service.

• Hold off buying and rent while you work on your financial profile. Making timely rent payments also helps build positive credit history.

• Explore FHA loans that allow scores as low as 500. But FHA loans require mortgage insurance, unlike VA loans.

• Enlist a real estate agent experienced with low credit borrowers. They can suggest lenders and programs you may not know about. I felt better having a guide through the process.

• Work on saving a larger down payment of at least 10%. A bigger down payment shows lenders you’re financially committed.

With time and discipline, you can get back on track to qualifying for a mortgage. My journey from bad credit to VA loan approval took persistence through setbacks. Stay encouraged knowing the VA wants to help veterans and service members become homeowners.