How to Qualify for a VA Loan with Bad Credit

If your credit isn’t great, you’ll be pleased to hear about one of the biggest advantages of VA loans – lower credit score requirements. 

While it’s possible to qualify for a VA loan with poor or bad credit, it will likely impact your interest rate, so if you’re close to reaching a higher credit tier, it may be wise to pause and improve your score before completing your application.

Can you get a VA loan with bad credit?

Yes, but there are a few considerations you should know. While the VA sets the basic guidelines for VA loan eligibility, individual lenders who provide the financing often have additional requirements that mortgage borrowers must meet. 

To get approved for a VA loan, you need to satisfy your lender’s financial criteria, which typically include sufficient income, an acceptable debt-to-income ratio, and a credit score that aligns with the lender’s standards.

Let’s classify credit that’s considered good, fair, and poor. Generally, credit scores range between 300 to 850. According to Equifax:

• Good Credit Score: 670-739
  Typically, lenders view those with a credit score of 670 or higher as adequate or lower-risk mortgage borrowers.
• Fair Credit Score: 580-669
  Individuals in this category are often considered higher-risk mortgage borrowers. If your score is between 580 and 620, you may have a tougher time qualifying for new credit.
• Poor Credit Score: 300-579
  If your score falls within this range, you may have difficulty getting approved for new credit. If you find yourself in the poor category, depending on the circumstances behind poor credit, you may need to improve your credit score before you can obtain any new credit.

Many lenders require a credit score of at least 620 to obtain a VA loan. However, some lenders may approve you with a score of 580, and others may go as low as 550 or even 500.

If you have a credit score of, say, 550, most lenders won’t approve you for a VA loan. But, a few may, so what will they be looking for to offset bad credit?

• Improvement in your credit history over the last two years
• A flawless history of paying your rent or current mortgage on time over the past 12 months
• Sufficient residual income – or what’s left after paying all other bills – to cover your monthly mortgage payment

It’s important to note that the VA must approve the lender, and they may reject one providing a loan to a borrower with a very low score if it doesn’t meet VA standards. The best VA home loan lenders for those with bad credit work closely with the VA to ensure the loan won’t become a financial burden for you.

Bad Credit Usually Means a Higher Interest Rate

Your credit score is a direct representation of how you’ve managed debt obligations over time. It also indicates your creditworthiness and the likelihood of responsibly managing and repaying future debts. 

Lenders generally see higher credit scores as a sign of lower risk, which typically translates to more favorable interest rates. Alternatively, lower credit scores often mean higher rates. 

VA mortgage borrowers may also get a quick idea of the interest rate they qualify for by going to a lender’s site and looking through their credit criteria.  

Compensating Factors Can Help

If your credit score is on the lower end, you may still be able to obtain VA financing thanks to what’s known as compensating factors. Underwriters may consider compensating factors to help balance out concerns or weaknesses in your loan application.

Let’s look at some examples of compensating factors from the VA Lender’s Handbook that may be considered if you have poor credit:

• Conservative use of consumer credit
• Little or no consumer debt
• Long-term employment
• Sizable liquid assets
• Significant down payment
• Considerable equity (for refinance loans)
• Little or no increase in shelter expense
• Military benefits
• Previous homeownership experience
• High residual income
• Low debt-to-income ratio
• Childcare tax credits
• Homeownership tax benefits

Can you get a VA loan with no credit history?

Yes, it’s possible to get a VA loan even if you have no credit history. This can be especially helpful for veterans returning from deployment with no payment history. 

Not having enough payment history often means you won’t have a traditional credit score. In such cases, VA lenders may be able to use rent, utility, car insurance, and other payment histories to make an approval decision. 

It’s important to note that VA underwriters view your housing payment history as one of the strongest indicators of your ability to responsibly manage a new home loan. Do your best to pay your rent or mortgage payments on time.

How to Improve Your Credit Score for a VA Loan

If your financial situation or credit score needs improvement, but you’re ready to apply for a VA home loan, here are ten strategies to increase your approval chances.

1. Pay Your Bills on Time

This one may seem obvious, but it’s imperative to stay on top of your monthly bills. Pay them early if possible. This is especially true when it comes to housing payments. If you live in military housing, ensure rent payments are reported to credit bureaus to help build credit history. 

2. Set Up Automatic Payments (Autopay)

Given the demanding nature of military service, set up automatic payments for bills and loans to avoid late payments, especially during deployments or training.

3. Improve Your Credit Utilization 

Keep your credit card balances under 30% of your available credit limit. Lowering your credit utilization ratio often boosts your credit scores, especially if your starting point is above that ideal 30% mark. 

4. Keep Lines of Credit Open 

Often, closing lines of credit hurts your credit score. Whether you use them or not, keep credit lines open.   

5. Get a Secured Credit Card 

Secured credit cards are great for building credit. If you get a secured card with the aim of building credit, focus on paying the bill in full and on time each month to build a positive payment history and avoid racking up interest.

6. Use Military Financial Programs

If you’re having financial challenges, your service relief organization may be able to help. Army Emergency Relief, the Navy-Marine Corps Relief Society, and the Air Force Aid Society are available to help you through financial emergencies. Depending on the circumstances, service relief organizations provide emergency financial help with interest-free loans, grants, or a combination of loans and grants

7. Take Advantage of PCS Resources

Unlike temporary duty assignments, Permanent Change of Station (PCS) orders are longer-term assignments, generally two to four years. During PCS moves, take advantage of available military resources to manage your finances effectively, avoid missing payments, and maintain good credit.

8. Use the Servicemembers Civil Relief Act (SCRA)

Ensure that your creditors apply SCRA benefits, which can include reduced interest rates on loans and protection from certain negative credit reporting.

9. Communicate With Creditors While Deployed

To possibly negotiate payment plans or deferments, inform your creditors of your deployment status, as this can help prevent negative impacts on your credit.

10. Sign Up For Free Credit Monitoring

Use free credit monitoring services, such as those offered by the major credit bureaus, to keep track of your credit score and promptly address any discrepancies.

Getting a VA loan With Less-Than-Perfect Credit

Bad credit can happen to anyone. Unexpected events like job loss or sudden medical expenses can negatively impact your financial situation and hurt your credit. 

The good news is that bad credit doesn’t have to stand in the way of your homeownership dreams. VA home loans can be a great option for military borrowers with poor credit.

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