How to Get Approved for VA Loans With Bad Credit

Getting approved for a VA loan when you have bad credit may seem daunting, but it is possible with the right preparation and knowledge. As a veteran, you’ve earned benefits like VA loans, and your credit history doesn’t have to be perfect to qualify. While every lender has their own criteria, this guide will walk you through the key steps to improve your chances of getting a VA loan approval even with less-than-ideal credit.

What is Considered Bad Credit for VA Loans?

The VA itself doesn’t actually set specific minimum credit requirements for its loans. That decision is left up to individual lenders. However, many lenders consider a credit score below 620 as “poor” credit. Some may approve VA loans for borrowers with scores in the 500s while others may want to see at least 600 or higher.

In addition to your score, lenders look at:

• Your payment history – Have you made late payments or missed payments? Lenders will review your credit report for any red flags like collection accounts or other negative items,

• How much you currently owe – Lenders want to see that your debts are manageable compared to your income. High balances and maxed out cards are negatives.

• Length of credit history – In general a longer credit history with established accounts looks better than only having new credit.

For VA loans, timely rent, utilities, and other payments can help offset weaknesses in your credit report.

Steps to Improve Your Chances of Approval

If your credit score falls short of typical VA loan requirements, take these proactive steps to strengthen your loan application before applying:

1. Check for Errors on Your Credit Reports

Mistakes happen, and you could have incorrect late payments or other negative items dragging down your score. Get free copies of your reports from AnnualCreditReport.com and scour them for any inaccuracies. Dispute errors with the credit bureaus to potentially improve your score.

2. Pay Down Balances

High balances and maxed out cards hurt your credit utilization ratio (the percentage of your total credit limit that you’re using). Pay down balances to get your utilization below 30% if possible. This can provide a quick boost to your score.

3. Become an Authorized User

Ask a family member with good credit to add you as an authorized user on one of their long-standing credit card accounts. This can give your credit history a positive lift.

4. Limit New Credit Applications

Each credit application triggers a hard inquiry on your report, which can ding your score a few points. Avoid applying for multiple new credit accounts in a short period of time leading up to your VA loan application.

5. Build Savings

Lenders view savings as a positive sign of financial stability. Work on building your emergency fund and down payment savings. Come to the table with adequate reserves.

6. Manage Debt Carefully

Pay all bills on time going forward so you can start establishing a positive payment record. Pay down high balances and don’t take on new debt right before applying for your VA loan.

7. Get Credit Counseling (If Needed)

Nonprofit credit counseling agencies can help create a structured debt repayment plan to get you back on track if you are overwhelmed. This shows lenders you’re committed to improving your finances.

Factors VA Lenders Consider With Lower Credit

When reviewing VA loan applications from borrowers with credit challenges, lenders look at the full picture to determine your ability to handle the mortgage responsibly. Some positive factors they consider include:

• Significant income and assets
• Conservative use of credit
• Minimized debts
• Securing a down payment
• Proof you’ve paid housing expenses on time
• Completing credit counseling or bankruptcy repayment plan
• Length of time since any credit events
• Receipt of disability or other benefits

Bringing compensating factors like these to the table can help offset credit weaknesses when applying for a VA loan.

Types of VA Loans Available for Bad Credit Borrowers

Here are some of the main types of VA loans that may be attainable even with poor credit:

VA Purchase Loans

The VA’s most popular loan program helps borrowers purchase a home with flexible credit guidelines and no down payment requirement. You can buy a primary residence for up to $647,200 without any mortgage insurance.

VA Cash-Out Refinance

VA borrowers can tap into their home equity through a cash-out refinance, converting it to cash to pay off debts, make home improvements, or other uses.

VA Streamline Refinance

Also called the Interest Rate Reduction Refinance Loan (IRRRL), this option allows existing VA loan borrowers to refinance for a lower rate/payments without an appraisal, credit check, or income verification. As long as you’ve made on-time mortgage payments, it can be a good option for better loan terms after a drop in credit.

Choosing the Right VA Lender

Not all lenders interpret VA credit guidelines the same way. When shopping for your VA loan, compare multiple lenders to find one that will look at the full picture of your financial situation, not just your score.

Online lenders like Veterans United, Navy Federal Credit Union, and PenFed Credit Union are known for more flexible credit requirements. Working with a reputable VA loan specialist can also help navigate the process.

Be wary of any lender promising guaranteed approvals regardless of your credit. There are no “sure things” when it comes to mortgage loans. But with prudent preparation and a committed VA lender, you can absolutely set yourself up for success.

Alternatives if a VA Loan Isn’t Approved

If your credit situation simply won’t work for a VA loan right now, you may want to consider:

• Working on improving your credit for 6-12 months and then reapplying when your score and/or other factors have improved.

• Looking into FHA loans, which allow scores as low as 500 with at least 10% down payment.

• Exploring USDA loans for rural properties with flexible credit and 100% financing.

• Finding alternative low down payment loan programs from state housing agencies or nonprofits.

• Considering non-traditional credit options like rent-to-own agreements or seller financing.

• Consulting a HUD-approved housing counselor for customized advice on your options.

• Contacting your lender’s underwriting department directly to plead your case if you were close to approval (can’t hurt to ask!).

While it may require extra effort, with diligence and patience, veterans can absolutely attain the dream of homeownership with VA loan benefits even with less-than-perfect credit. Don’t get discouraged if your first VA loan application doesn’t work out. Use it as a learning experience to continue strengthening your financial profile and work toward getting approved down the road.