Can You Get a VA Loan with Bad Credit?

You’re dreaming of buying a home using a VA loan, but you’re concerned that your credit history will stand in the way. It’s reality that having good credit means you’ll get the best rate on a home loan, no matter what type of mortgage you’re getting. That said, it is possible to get VA loan with bad credit.

The Department of Veterans Affairs isn’t the lender for a VA mortgage loan but backs, or guarantees, the loan you get from an approved lender. The VA understands the financial challenges veterans face, particularly not having some of the opportunities to build wealth that other Americans have because they spent that time in the military.

Many factors go into whether your loan will be approved, what your interest rate will be and how much money you can borrow. A low credit score or even a bankruptcy or foreclosure in your past are not obstacles to getting a VA loan.

Minimum Credit Score for VA Loan

There is no minimum credit score to qualify for a VA loan. Banks and mortgage companies that lend the money for VA loans, though, do have credit score requirements.

In general, you must have at least a 620 credit score to get a VA loan from most lenders. If your have a 550 or even 500 credit score, though, you may still be able to find a lender for a VA loan. Keep in mind that the VA must approve the lender and may nix one offering a loan to a borrower with a very low score if the loan doesn’t meet the VA’s standards. The best VA home loan lenders for bad credit work closely with the VA on the loan and making sure it will not become a financial burden for you.

The VA will only guarantee a loan if you are not a credit risk. With any VA loan, your income and assets play a part in getting approved and determining how much money you can borrow. If your credit score is low, that doesn’t mean your recent credit history can be in a shambles.

The VA requires that lenders look closely at your finances, including the last 12 months of your credit history to make sure you are a satisfactory risk. There must be no delinquent payments for that period. Other factors, including income, debt and employment also must past muster.

Keep in mind that the better your credit score, the better the interest rate and terms of your loan will be. If you can take the time to improve your credit score, do so.

Other Flexible VA Loan Requirements for Veterans

The VA wants to help put veterans into their own home. Homeownership is one of the best ways for Americans who don’t have high-paying jobs or inherited money to build wealth. But the VA doesn’t want veterans to end up in a debt spiral and foreclosure, so it has many requirements for veterans,  military members and surviving spouses who qualify for loans. Some of the requirements are flexible, some are not.

Credit Score

The VA has no minimum credit score requirement, but credit score will be taken into account by a lender. Most will require 620, but there are loans available for borrowers with lower credit scores.

Debt-to-Income Ratio

Debt-to-Income Ratio (DTI) is monthly debt payment amount compared to gross monthly income. DTI measures how well you manage your debts. Gross monthly income is income before taxes and other deductions. Debt is borrowed money, including auto loans, credit cards (balances are borrowed money), other loans and credit. The VA requires a 41% DTI, though in rare cases may allow up to 50% if income and other financial factors exceed requirements.

Residual Income

Residual income is how much money you have every month after necessary expenses. The amount the VA requires for a loan isn’t the same for everyone and is based on data supplied by the  Department of Labor’s Bureau of Labor Statistics. It varies depending on loan size, family size and region of the country. The amount allowed changes as economic trends do.

Foreclosures and Bankruptcy

VA loans offer a major break when it comes to foreclosure or bankruptcy. A traditional mortgage requires a seven-year wait after either. You can apply for a VA loan 24 months after a foreclosure or Chapter 7 bankruptcy. You can get one 12 months after a Chapter 13 bankruptcy is discharged. Lenders, though, have the final say on whether to approve the loan and what terms you’ll get.

Entitlement

Entitlement is the maximum loan amount the VA will back. If your certificate of eligibility (COE) shows full entitlement, there’s no maximum. The lender, though, will determine how much you can borrow based on finances and credit. If you haven’t fully paid the VA back after a foreclosure, or owe on a previous VA loan, the maximum is your county loan limit, determined by the Federal Housing Finance Authority, minus what you owe.

Ways to Improve Your Credit Score

The fact the VA has no credit score requirement for a mortgage loan does not mean that credit score doesn’t matter. The mortgage lender decides if you’re a good credit risk, and the better your score, the better loan terms you’ll get.

It may be hard to rein in your credit and get your finances under control, but once you do, the process for improving your credit score is simple. Credit score isn’t a measure of how much money you have in the bank or how much your stuff is worth. It’s a measure of how good you are at managing debt and paying it back.

There are three credit reporting agencies – Equifax, Experian, and Transunion – and they compile all your credit accounts and track your monthly payments. On-time payments, the amount of credit you have, how often you apply for credit, what type of debt you have and how much of your available credit you use all have an impact. Everything you do with credit, big and small, will move your credit score up or down. Here are some ways to improve it:

Pay Your Bills on Time

Missed and late payments are the biggest credit score ding. One strategy for consistent on-time payments is to schedule autopayments; they come out of your account without your having to do it. Making the pay date the same for all of your bills, if possible, means you don’t have to remember different dates. One date also helps with budget organization. Be sure the money’s in your account on payment day.

Consider Debt Consolidation

Debt consolidation can help you pay bills on time and boost your credit score. Use a debt consolidation loan to pay off high-interest credit cards. Or, to eliminate credit card debt, use a debt management program through a nonprofit credit counseling agency. The agency works with your creditors to get lower rates and waive fees. They pay down your cards while you make one monthly payment to the agency.

Improve Debt-to-Income Ratio

While DTI specifically isn’t part of credit scoring, the less debt you have relative to your income, the more attractive your finances are to lenders. Lowing debt also frees up more residual income to continue to pay it down and increase your credit score.

Limit Applications for New Lines of Credit

Every application for a new line of credit means a hard pull on your credit report. The three credit reporting bureaus only allow a certain amount of hard pulls before they reduce your credit score.

Keep Credit Utilization in Check

Credit utilization is how much credit you use vs. your credit limits. If your credit cards are maxed out or you carry big balances, that’s high utilization, which lowers your credit score. You’ll be stunned at how quickly your credit score improves as you pay balances down and keep them there.

Have a Mix of Credit

The credit reporting agencies like to see different types of credit in your report. Making payments on an auto loan or personal loan shows that you can manage debt that’s more complex than credit cards. It’s not the biggest factor that determines your credit score but it is part of it.

Keep Track of Your Progress

Watch your credit score to check the impact of your responsible debt management. It’s great motivation to work on further improvements. Most credit card providers and banks offer free credit tracking, with credit score updates as often as weekly. Get free credit reports at annualcreditreport.com and check that everything is accurate. If it’s not, follow the instructions to make corrections, which will improve your score.

Types of VA Loans You Can Get with a Bad Credit Score

There are several types of VA loans available to veterans, active duty military and surviving spouses.

Not only can you borrow money to buy, build or renovate a home, but there are also two kinds of refinancing loans. If you are eligible because of your military service, or your spouse’s, you can qualify for any of the available VA loans despite having bad credit. But, as always, factors including your income, employment, debt, and financial history will determine if you can get a loan and what its terms will be.

VA purchase loans and some refinancing loans don’t require downpayment, closing costs or private mortgage insurance, but most borrowers pay a funding fee between 1.25%-2.15% for their first VA loan, and 1.25%-3.3% for subsequent loans. The larger down payment the borrower makes, the lower the funding fee.

For all VA loans, the first step is to get a certificate of eligibility, which shows lenders that you qualify for the program and what your entitlement is.

VA Purchase Loan

VA purchase loans are backed by the VA with no down payment, closing costs or private mortgage insurance, something required for borrowers of traditional loans who put down less than 20%. The VA guarantees the loan up to $144,000 and then for 25% of whatever’s borrowed above that. The loans are from private lenders and can be used to buy, build, or improve a home.

VA Cash-Out Refinance Loans

VA-backed cash-out refinance loans can be used replace a non-VA loan or to take cash out of the equity on a home to use for debt consolidation, home repairs, or anything else the borrower wants. The borrower must live in the home they’re taking the loan out on. There are closing costs for most borrowers, which can be paid at closing or rolled into the loan and paid monthly.

VA Interest Rate Reduction Refinance Loans (IRRRLs)

Borrowers who already have a VA loan and want to reduce their monthly mortgage payment can refinance with a VA IRRRL. It’s a new loan that replaces the current one. Borrowers must have made on-time payments to their current loan for the previous 12 months to qualify. There is no appraisal or income verification required, and closing costs can be rolled into the loan.

VA Native American Direct Loan (NADL)

Veterans who are Native Americans, or married to one, may be eligible for the NADL program, which provides loans to buy, build, or improve a home on federal trust land. NADLs can also be refinanced through the program to reduce the interest rate. There are requirements specific to the loan, including tribal agreement with the VA. Check the VA’s website to see if you qualify.