You want to buy a home with a VA loan but worry you won’t get approved due to credit issues. The good news is even with a low credit score, you may not be entirely out of luck. When you apply, lenders will look beyond this three-digit figure to determine if you qualify for a mortgage. Here’s what you need to know about getting a VA home loan with bad credit.
Can You Get Approved for a VA Loan with Bad Credit?
A lower credit score isn’t necessarily a deal-breaker when applying for a VA loan. It depends on the lender’s eligibility requirements.
Defining “Bad Credit” for VA Loans
FICO scores range from 300 to 850, with scores between 300 and 579 categorized as having “poor credit.” However, VA lenders have a different idea of “bad credit” and generally see scores below 620 as poor.
Credit Score and VA Loans
Minimum Credit Score for VA Loan Approval
The VA does not impose a minimum credit score requirement. Lenders can decide how low of a score they’re willing to accept. That said, most look for a FICO score of at least 640, and some will go as low as 620.
How Lenders View Credit Scores
Your credit score represents how you’ve managed debt obligations over time. It also demonstrates your creditworthiness or the likelihood of responsibly managing and repaying future debts.
A higher credit score is more favorable in the eyes of lenders and often equates to a lower interest rate. However, higher interest rates are offered to borrowers with lower credit scores, as the risk of default is higher.
Importance of Credit History in VA Loans
Your credit history spans beyond your credit score. It is reflected in your credit report and includes details about each of your credit accounts, including outstanding balances, payment history and minimum payment amounts.
A strong credit history provides reassurance to lenders that you are able to repay your loans. And with VA loans, a solid credit history can sometimes compensate for a lower credit score.
Strategies on How to Get a VA Home Loan With Bad Credit
If your credit score isn’t up to par but you’re ready to apply for a VA home loan, here are some strategies to help boost your approval odds.
Improving Your Credit Score
If time permits, it’s worth working on your credit score to give yourself the best chance at getting approved for a VA home loan with competitive terms. Pay all your bills on time and get current on any past-due accounts (if applicable). Also, pay down your revolving credit card balances to help lower your credit utilization rate and potentially boost your score. Refrain from applying for new credit, as each hard inquiry will ding your credit score.
Gathering Necessary Documentation
The lender will request proof of income, tax returns and employment history. You will also need to provide your Certificate of Eligibility (COE) to confirm you meet the service requirements. These documents are then assessed to determine your eligibility for a VA home loan.
Using a Cosigner for a VA Loan
A co-signer can help make your application for a VA loan more appealing to lenders. Be sure to choose someone who has a strong financial profile and understands the responsibilities involved with co-signing.
Applying with a Larger Down Payment
VA loans do not require a down payment, but putting funds down could help you get approved for funding if you have bad credit. It demonstrates your commitment to preparing financially for a home and minimizes the risk of default posed to the lender.
Leveraging Residual Income Calculations
Residual income refers to the amount of money left after all major expenses are paid. VA lenders use this calculation to confirm you can afford the monthly mortgage payments. Even with bad credit, demonstrating strong residual income can boost your application.
Seeking Professional Help
Solicit the assistance of a credit counselor or financial advisor that can provide valuable guidance. They can help you identify ways to improve your credit score and manage your finances more effectively. Professional mortgage experts can also help you understand the VA loan application process and provide recommendations on other ways to optimize your finances to win the approval of lenders.
Working with Lenders Experienced with Bad Credit
Some lenders specialize in working with credit-challenged borrowers seeking VA loans. These lenders offer tailored solutions and more flexible guidelines and may be able to assist with your lending needs.
Common Myths and Misconceptions
Myth: VA Loans are Only for Perfect Credit
Not necessarily. While strong credit scores are more appealing to lenders, the VA does not set a minimum credit score requirement. So, you may find a lender that is willing to work with you if there are other compensating factors.
Myth: Interest Rates are Higher for Those with Bad Credit
A less-than-perfect credit score doesn’t automatically mean you’ll get stuck with a hefty interest rate on a VA loan. The reality is these loan products typically come with more competitive interest rates than you’ll find with conventional loans, even with lower credit scores. Since the VA backs these loans, lenders get more security and can extend more attractive terms to riskier borrowers.
Myth: VA Loans are Harder to Get than Conventional Loans
VA loans have flexible lending requirements compared to traditional loan products. While conventional loans often require a higher down payment and credit score, VA loans offer benefits like no down payment options and more lenient credit requirements. The goal is to make homeownership accessible for those who’ve served while conventional loans aren’t restricted to a certain group of borrowers.
Conclusion: Improving Your Chances of Getting a VA Loan with Bad Credit
If you have bad credit, you may still be able to get a VA loan. By understanding general lending guidelines and the role your credit score plays in the lending process, you can boost your approval odds.
FAQs About VA Loan with Bad Credit
There is no preset minimum credit score requirement with the VA for home loan products, but most lenders prefer a credit score of at least 640.
Yes, but you’ll generally need to wait at least two years before lenders will consider you for a loan.
You likely won’t qualify for the best terms on a VA loan with bad credit. Still, they could be more competitive than you’ll find with traditional loans.
