Your Guide To Getting A VA Loan With Bad Credit

The Department of Veterans Affairs (VA) loan program was designed to make the home buying and refinancing processes more accessible and affordable for veterans, qualifying service members and surviving spouses. As a type of government-backed mortgage, VA loans also pose less risk to lenders and require less upfront investment from borrowers.

So if you qualify for a VA mortgage and have your certificate of eligibility (COE) in hand, you may enjoy loan benefits such as lower interest rates, a low – or even a zero – down payment, and lower credit score requirements.

But what if you’re a military borrower with bad credit? Can you still qualify for a VA home loan? Let’s look at what credit requirements you have to meet – as well as what steps you can take – to qualify for a VA loan with bad credit.

Is It Possible To Qualify For A VA Loan With Bad Credit?

Yes, it’s possible to qualify for a VA loan if you have bad credit. The VA has no minimum credit score requirement, and while some mortgage lenders require you to meet a qualifying score, they’re still required to look at your entire financial profile.

So while you may have a less-than-stellar credit history, you could still qualify for a VA loan. You may just have to accept stricter terms, such as a higher mortgage rate, than a borrower with a stronger credit history.

Requirements For Getting A VA Loan With A Bad Credit History

Your credit score is one data piece of your overall credit, but it doesn’t tell the whole story. During the underwriting process, your lender will look at your entire credit history – which is a record of how well you’ve managed debt – to determine how responsibly you’ve made payments towards loans, credit accounts and other debts.

Let’s look at some of the VA loan requirements and allowances for the following bumps, or delinquencies, in your credit history.

Low Credit Score

While the VA guarantees your VA purchase or refinance loan, the mortgage lender funds the actual loan and sets a minimum credit score according to how much risk they can tolerate. Some lenders go as low as 500, but most will set a minimum score between 580 and 650. Our friends at Rocket Mortgage® require a median FICO^® Score of 580.

Because a potential borrower with a low credit score presents more risk to lenders, you’ll probably be required to offset that risk by assuming a higher interest rate, lowering your debt-to-income (DTI) ratio or even contributing a higher percentage of the loan amount as a down payment.

Lenders will also examine your last 12 months of payment history to make sure you’ve paid rent and utilities – as well as other expenses, bills and debt obligations – on time.

Bankruptcy

If you have a bankruptcy in your credit history, you can still qualify for a VA loan. The type of bankruptcy you filed will determine when you can apply, but the waiting period is generally shorter for VA loans than conventional loans – or even other types of government-backed loans, such as Federal Housing Administration (FHA) loans or United States Department of Agriculture (USDA) loans.

• Chapter 7: If you filed a Chapter 7 bankruptcy, you’ll have to wait a period of 2 years after the court dismissed or discharged the bankruptcy – rather than when the bankruptcy was filed – to apply for a VA loan.
• Chapter 11: Self-employed clients with the Chapter 11 bankruptcy have a 2-year waiting period after discharge or dismissal.
• Chapter 12: Those who have experienced a Chapter 12 bankruptcy only need to wait for discharge or dismissal before applying.
• Chapter 13: With a Chapter 13 bankruptcy, you won’t have a mandatory waiting period before you can apply for a VA loan. However, some lenders may require that you’ve consistently made payments on time for a term of 12 months to qualify. Rocket Mortgage allows you to apply as soon as the bankruptcy is dismissed.

Foreclosure

A foreclosure occurs when a homeowner defaults on their mortgage payments. Their lender forecloses, or repossesses, the house and may attempt to resell the property.

While you’d need to wait 7 years before applying for a conventional loan, you’ll typically wait a minimum of 2 years before you can apply and qualify for a VA loan with a foreclosure on your credit report.

Because a foreclosure will significantly impact your credit score, you’ll also need to spend that waiting period rebuilding your credit.

If you were able to avoid foreclosure with a short sale or a deed-in-lieu of foreclosure, you may still experience a similar two-year waiting period before applying for a VA loan. The advantage of these is that the credit hit may not be quite as severe.

How To Get A VA Home Loan With Bad Credit

If your low credit score or overall credit report is a barrier to qualifying for a VA loan, including a VA cash-out refinance, here are a few actionable steps you can take to build credit, improve your financial profile and present yourself as less of a risk to lenders:

• Verify your credit score. Your first steps should be to figure out what your score is, see what’s on your credit report and file a dispute if you see any errors or if anything looks amiss. Be sure to stay up to date on your credit activity and reporting. You can get your free VantageScore^® credit score and report from TransUnion^® once a week through Rocket Homes^SM.
• Increase your credit score. Improving your credit score will take some time. But if everything in your credit report checks out, you can raise your score in a number of ways, including:
  • Improving your payment history by paying your bills on time
  • Paying toward credit cards and lines of credit until you’re under 30% of the balance on all accounts
  • Consolidating your debt into a single monthly payment
• Make a higher down payment. While the VA doesn’t require a down payment for a VA loan, your lender might – especially if your low credit score is a potential concern. Saving for a down payment can lessen that risk and prove to your lender that you’re a serious borrower.
• Find a co-signer. If your spouse – or a fellow military service member who qualifies for a VA loan – has a better financial profile than you do, you can have them co-sign on the mortgage. This can help you qualify by lowering the risk of a loan default.
• Improve your debt-to-income (DTI) ratio. With a median credit score of 620, a borrower can possibly qualify for a VA loan with a DTI ratio on the higher end. The exact amount varies and can depend on factors such as your credit score and residual income. However, if you have a score between 580 and 619, your DTI will likely need to be no higher than 45% in addition, you’ll be able to spend no higher than 38% of your monthly income on your house payment. To decrease your DTI, eliminate monthly payments by paying off smaller debts first. You can also try to increase your monthly income by asking for a raise or promotion or by earning supplemental income.

The Bottom Line

VA loans don’t require a minimum credit score, but VA lenders often set their own credit limits for buying or refinancing a home. Similar to conventional and FHA loans, a higher credit score will qualify you for a lower interest rate – and therefore a lower monthly mortgage payment – on your VA loan. Rocket Mortgage requires a minimum score of 580.

The VA guarantee does offset some risk and allows lenders to provide assistance in the form of more favorable terms and allowances to both active-duty and veteran borrowers and their spouses who are applying for a VA loan with bad credit on their path to homeownership.

Ready to apply for a VA loan? Start your loan application with Rocket Mortgage today to see what you qualify for. You can also call them at (833) 326-6020.