VA Home Loans for Bad Credit
Veterans Guide leads you through the details of VA home loans for bad credit. The program helps service members, veterans, and surviving spouses get a home loan when they might not otherwise qualify. The VA provides guarantees to lenders that reduce their risk, making them more likely to approve funding, even for applicants with bad credit scores.
Bad credit can be a barrier to homeownership for many people. If you are a veteran, a surviving spouse, or a current service member, VA home loans for bad credit can help you get funding for a home.
Veterans Guide can lead you through how these loans work for people with bad credit and what other factors might help determine the final cost of a loan.
What Are VA Home Loans?
The Veterans Benefits Administration, which is part of the U.S. Department of Veteran Affairs, administers the VA home loan program.
VA home loan is actually a guarantee to the lender, not a direct loan from the VA. The guarantee applies regardless of the applicant’s credit score. VA home loans guarantee the lender receives up to 25 percent of the cost of the loan, lowering the lender’s risk. The aim is to entice lenders to approve home loans, even for those experiencing financial challenges.
Veterans are usually eligible for VA home loans, as are current service members and the surviving spouses of those who have passed away. While the VA itself doesn’t require down payments, individual lenders might request them for some VA loans.
VA home loans do not exclude people with bad credit or low credit. In fact, the VA does not have a minimum credit score for a VA home loan. A private lender might impose a minimum score, but you can try another lender if you don’t meet a certain one’s criteria. However, it is still important to be aware of credit requirements set by lenders in order to secure a VA Home Loan.
Can You Qualify for a VA Home Loan With Bad Credit?
So, can you get a VA home loan with bad credit? It depends on criteria, such as your debt-to-income ratio, your savings amount, and other factors. Even though the VA home loan program imposes no minimum credit score requirement, individual lenders might have other mortgage approval guidelines.
You can start by looking at the FICO credit score range chart before you start shopping for a VA home loan to get an idea of what a “bad” credit score is:
- Exceptional: 800 and above
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 579 and below
A “good” credit score means you’re at about the average credit score for U.S. consumers. “Fair” is below the average, and “poor” is well below average.
Although lenders might generally offer loans to people with “fair” scores, they might see someone with a “poor” score as too high a risk. In some cases, however, with the VA’s backing, someone with a “poor” credit score can still get a home loan.
What Is the Minimum Credit Score To Qualify?
The VA has no minimum credit score or loan limit, but private lenders ultimately decide whether or not to issue funding for a home loan. You need a minimum credit score between 500 and 580 to qualify for an FHA loan, depending on how much you’re putting down. You typically need at least a 620 for conventional loans, but some banks require higher scores.
If your credit score is lower than the ideal, you might have to do a bit more research to see which private lenders might offer you a mortgage. Even if a lender does approve you for a home loan, the interest rate might be higher than if you had a good credit score. The interest rate can also vary significantly between lenders.
VA Home Loans for Foreclosure and Bankruptcy
If you have had a property foreclosed or declared bankruptcy, you can also qualify for a VA home loan for bad credit. The VA reduces the waiting period to get loan approval after one of these events.
Getting a conventional mortgage generally takes at least seven years after a foreclosure. After a bankruptcy, the typical wait is four years.
However, while a prior foreclosure or bankruptcy can keep you out of the conventional home loan market for years, the VA home loan program can help you access a home loan even if you’ve struggled financially. The typical waiting periods for VA-backed home loans are:
- Two years after Chapter 7 bankruptcy
- One year after Chapter 13 bankruptcy
- Two years after a foreclosure
What Types of VA Loans Can You Get With Bad Credit?
Regardless of your credit score, the application process and types of VA loans are the same. It might help to start by understanding your loan options to see what might be best for your financial situation.
VA Purchase Loans
A VA purchase loan can be used to purchase a home, condominium, or manufactured home, among other qualifying purchases. If you have bad credit, in addition to reviewing your eligibility through the VA home loan program, a private lender might also look at your history of making payments for rent and other expenses to assess your risk level.
VA Cash-Out Refinance Loans
A VA cash-out refinance loan lets you take equity out of your current home. You can use this loan to refinance your home under better terms. Using the cash from the new loan to pay off other debt can raise your credit score in the long run.
VA Interest Rate Reduction Refinance Loans
A VA interest rate reduction refinance loan, or IRRRL, lets you replace your current VA home loan with a new loan with better terms. It can reduce your interest rate and lower your monthly payments. You might also be able to change from an adjustable rate to a stable, predictable fixed rate. To qualify, you usually only need to show you have made your current VA home loan payments on time for the past 12 months.
What Factors Are Important for a VA Home Loan With Bad Credit?
If you don’t have a high FICO score, other criteria can become more important for a VA home loan. These are other indicators of your financial history and risk level that lenders use to determine loan eligibility.
Debt-to-Income Ratio
The debt-to-income ratio, or DTI, reflects your history of paying bills consistently and on time. Like with a lower credit score, you can still get a VA home even with a lower DTI.
Your DTI is calculated by comparing your monthly gross income to your debt obligations. Generally, your DTI cannot be more than 41 percent to qualify for a VA home loan. You can do this calculation to determine your DTI:
- Monthly gross income: $5,000
- 41 percent of monthly gross income: $ 5,000 x 0.41 = $2,050
Since 41 percent of your monthly gross income is $2,050, you will have a DTI of less than 41 percent if your monthly debt obligations are less than $2,050.
However, you might still qualify for a VA home loan if you have a DTI of more than 41 percent. The lender can look at other factors to assess your eligibility, such as:
- Long-term employment
- Low use of credit
- Significant savings
- Other military benefits
If you have a high DTI or bad credit, your VA home loan might have a higher interest rate than if you had a lower DTI or better credit.
Residual Income
The VA also considers how much money you have left over every month after paying your expenses. This is called residual income. The VA has specific tables for residual income that can help applicants qualify for a home loan even with bad credit. The tables look at the number of people in your household, the region where you live, and the loan amount to calculate residual income.
How Can Veterans Improve Their Credit?
Veterans can take some steps to help improve their credit, whether they want to qualify now for a VA home loan or do so in the future.
- Monitor your credit through a credit monitoring service, or get a free annual credit report from annualcreditreport.com.
- Place an active duty military alert on your credit report while you are overseas to protect against fraud.
- Dispute all mistakes on your credit report.
- Pay your bills on time.
Kevin McVeigh
A member of the Pennsylvania Bar and formerly a partner of a law firm, where he handled a diverse case load, Kevin is the editor of Veterans Guide’s content. He meticulously researches the accuracy of all the information provided by the Veterans Guide website.
Get Help With a Veterans Home Loan
VA home loans for bad credit can help veterans, service members, and surviving spouses access homeownership. If you are a disabled veteran, you may also be eligible for a VA housing allowance to help you buy or build a home or make your current home more accessible.
To get assistance, contact Veterans Guide today.
