Get a VA Home Loan with Bad Credit
If your application for a mortgage is denied, it’s more than likely to be due to bad credit. But lenders recognize the issue, and not all loan programs are the same when it comes to credit. Some give more flexibility to approve people with lower credit scores or major credit problems like bankruptcies and foreclosures.
VA loans are guaranteed by the U.S. Department of Veterans Affairs, and allow for lower credit scores — or in some cases no credit score at all. The VA recognizes that active duty military and retired veterans may face financial challenges that civilians don’t.
The disruption of combat deployments and the adjustment to civilian life after active duty service can make managing finances especially difficult for members of the military. Veterans with service-related disabilities may also find it harder to find or keep employment as they are in and out of hospitals for treatments. The VA recognizes this sacrifice when it considers making loans to veterans and active duty borrowers with bad credit.
Is it possible to get a VA home loan with bad credit?
The VA’s credit guidelines give veterans more opportunities to purchase or refinance despite bad credit than any other major mortgage loan program. Below is a list of some of the credit flexibilities you’ll have with a VA loan:
- No minimum credit score: The VA does not have a minimum credit score requirement. Instead they look at your payment history, especially the last 12 months of your rent or mortgage payments. Explanations or proof of active duty deployments or disability-related health challenges for veterans may be sufficient to overcome a poor credit payment history.
- Only a two-year waiting period after a Chapter 7 bankruptcy: Even if you are making a 0% down payment, you may be eligible to get a mortgage after a bankruptcy if it’s been more than two years. That compares with a four-year waiting period for conventional loans. Make sure you have all of your bankruptcy papers and a copy of the discharge so the lender can verify the date. The VA is sensitive to service-related issues that may lead to a bankruptcy filing.
- Use bankruptcy or credit counseling plan payments to qualify: If you are currently making payments as part of a Chapter 13 bankruptcy plan or a credit counseling program, and can document 12 months of on time payments, you may be able to get a new VA loan.
- If you’ve had a foreclosure, the same two-year rule applies: The waiting period after a foreclosure will be the same as a bankruptcy. In this case, the benefit is even more generous: There can be a seven-year waiting period for conventional loans. If you have paperwork related to the actual date the foreclosure was completed, be sure to have it handy. The lender will need to confirm the date and public records are not always accurate when it comes to determining the final date a foreclosure was completed.
- Getting a new VA loan even with VA foreclosure: In the event that you had a foreclosure on a VA loan in your past, you still may be eligible to get a new VA loan, even if your eligibility has not been restored.
How VA bad credit loans compare with other loan programs
If you are considering other loan programs, or don’t want to use your VA eligibility, you should at least know the difference in the credit score and down payment options for each.
|How VA Loans Stack Up|
|Type of loan||Minimum credit score||Minimum down payment|
|VA||No minimum score requirement||0%|
The FHA loan provides for lower credit scores than conventional and USDA loans, but the down payment requirement is 3.5% to 10%. Although USDA loans will allow for 0% down payment, the minimum FICO score is 640. Conventional loans allow for 3% down payments, but also require a 620 minimum FICO score.
What the VA considers besides your credit score
Although the VA doesn’t have a minimum credit score, there are other aspects of your credit history they will look at.
Rent and mortgage payment history
If you’ve got several late payments on credit card and installment debt, but you’ve maintained your rent or mortgage payment on time, the VA will consider your loan for approval. VA guidelines put a premium on housing expense payment history, so a perfect rent or mortgage history carries more weight than a poor payment track record on other credit accounts.
Your most current 12 months of payment history
Whether you are currently in a Chapter 13 bankruptcy, or have several collections on your credit report from a few years ago, keep in mind that the VA is going to most closely scrutinize the last 12 months of payment history. Even if things were terrible credit-wise a year ago, the VA may consider your credit satisfactory if you’ve made payments on all of your other credit obligations on time for the past 12 months.
Your most current two years of payment history after a bankruptcy or foreclosure
In cases of foreclosure or bankruptcy, the VA will want to see 24 months of on-time payments on all of your other credit since the major credit event happened. Even one late payment will start the clock over: If you get to 14 months of on-time payments and then miss a payment on even the smallest credit card balance, the waiting period starts over from the most recent late payment.
Your CAIVRS history
CAIVRS is an acronym for the Credit Alert Interactive Verification Reporting System. When you apply for a VA loan, your information is checked to determine if you have defaulted on any federally assisted loans. The default information on the database searches for overpayments related to education benefits, disability benefits income, or claims paid due to VA loan foreclosures.
Types of VA loans you can get with bad credit
The VA doesn’t have any specific restrictions on types of loans you can get if you have bad credit. The lender reviews your overall loan package, not just your credit. A strong income and employment history, or enough savings in the bank to pay several months of your new mortgage payment, could help you overcome a weak credit score.
The VA also considers your residual income, which is a qualifying calculation unique to VA loans. Most loan programs will qualify you based on your debt-to-income ratio, which divides your total debt including your monthly house payment by your total gross (pre-tax) income.
Residual income, however, is calculated by subtracting your total housing and consumer debt and an estimated housing expense from your net (after-tax earnings) income. Basically, this looks at how much money would be left over in your bank account after making your debt payments and living expenses. This can be kinder to a borrower. The residual income requirement varies by loan amount, state and family size, and may be the determining factor for getting approved for a loan with bad credit.
Studies by the Urban Institute indicate that the residual income test may be a reason that there are far less defaults on the VA loan program versus other government loan programs like FHA. The idea is fairly simple: If you have enough spare cash after all your expenses are paid based on your after-tax paycheck, you are less likely to run into problems making your mortgage payment.
Here are the VA loan programs you may qualify for even if you have bad credit:
VA purchase loans with no down payment: There is no minimum score requirement for the 0% down payment financing on a VA home loan.
VA cash out refinances to 100% of the value of your home’s value: If your credit scores are low because of maxed out credit cards, and you don’t have the means to pay the balances down any other way, a cash out refinancing for debt consolidation may be a way to help pay. How much you owe, also known as credit utilization, makes up 30% of your credit score, and paying down balances could mean better terms on credit you apply for in the future.
VA interest rate reduction refinance (IRRRL): As long as you’ve made your payments on time for the past 12 months, you’ll be eligible for a VA interest rate reduction. If you’ve been 30 days late recently, you still may be eligible, but your lender may need to submit your loan to the VA directly to obtain a final approval. The IRRRL program doesn’t require any income documents or an appraisal, and can be a great way to save some money on your monthly payment without having to provide as much paperwork as a regular VA refinance.
Yes, you can get a VA loan with bad credit
However, ideally you’ll take some steps to improve your credit before you apply for a VA loan, like tracking your credit score through a credit monitoring system or cleaning up your credit with the help of a credit repair company. Like any other type of mortgage loan, your interest rate and the costs associated with it will be higher the lower your credit score is.
If things deteriorate to the point where you aren’t sure if you will be able to make a house payment, be sure to contact the VA directly. Unlike other loan programs, the VA is legally required to work directly with borrowers on home preservation efforts. You won’t have to discuss your situation with a third party loan servicer that can’t make any decisions about how to help. That’s just one more way the VA makes efforts to help borrowers in even the most dire credit situations.