Can You Get a VA Home Loan with Bad Credit?

Military borrowers with bumps in their financial history may find it easier than they think to get approved for a VA home loan with bad credit. Recognizing some active-duty and retired service members face financial challenges that civilians don’t, the U.S. Department of Veterans Affairs (VA) will even guarantee mortgages for veterans with major credit problems, like bankruptcies and foreclosures.

Is it possible to get a VA loan with bad credit?

The simple answer: yes. VA guidelines were designed with the special needs of military borrowers in mind. The disruption of combat deployments and adjusting to civilian life after active-duty service can sometimes lead to extra financial difficulty for military families.

Below is a list of some of the credit flexibilities available to VA borrowers:

• No minimum credit score. There’s no minimum credit score set by the VA, although many lenders require a 620 minimum score. However, the last 12 months of payment history are scrutinized closely, especially your rent or mortgage payments. You might be able to overcome a poor credit payment history with explanations or proof of active-duty deployments or disability-related health challenges.
• 2-year waiting period after a Chapter 7 bankruptcy. The VA is sensitive to service-related issues that may lead to bankruptcy filings. Military borrowers have to wait just two years from their bankruptcy discharge date to apply for a new VA loan (compared with four years for a conventional loan).
• 12 months of payments on a Chapter 13 bankruptcy or credit counseling. VA borrowers who’ve made 12 on-time monthly payments as part of a Chapter 13 bankruptcy or credit counseling program may qualify for a new VA loan.
• 2-year waiting period after a foreclosure. Military borrowers who lost a home to foreclosure are eligible for a VA loan after two years post-closing.
• VA foreclosure flexibility. VA borrowers can take out a new VA loan, even with a foreclosed VA loan on their certificate of eligibility. If you have enough VA entitlement remaining, you may be able to buy a new home with no down payment.
• No credit history. Veterans returning from deployment may not have enough payment history for a traditional credit score. In that case, VA lenders may consider rent, utility, automobile insurance and other alternative payment histories to make an approval decision.
• Residual income. The VA uses a unique calculation based on how much free cash you have each month after subtracting monthly expenses, including maintenance on your home. Also known as “residual income,” you may qualify for a VA loan with bad credit if you have extra room in your budget each month.

Types of VA loans you can get with bad credit

Whether you apply for a loan with bad credit to refinance or buy a home, the VA credit requirements are basically the same. Available VA loans types include:

VA purchase loans. VA borrowers buying a house with bad credit may be eligible for no down payment and no mortgage insurance (a type of insurance charged on most home loans if you make less than a 20% down payment). If your credit scores are low, lenders will pay close attention to how you’ve paid your rent and other bills in the past 12 months.

VA cash-out refinance loans. Homeowners can use a VA loan to borrow up to 90% of their home’s value, tapping extra equity to improve their home or pay off high-interest credit accounts. An added bonus: Paying down credit cards with a VA cash-out refinance could boost your scores so you don’t need a bad credit mortgage in the future.

VA interest rate reduction refinance loans (IRRRLs). Borrowers with a current VA loan only need to prove they’ve made their payments on time the past 12 months to be eligible for a VA IRRRL. Home appraisals and income documents aren’t required, and closing costs can be rolled into the loan amount. Even if you were 30 days late on a recent mortgage payment, your lender may still approve an IRRRL by submitting your loan directly to the VA for approval.

Special note about VA closing costs and bad credit

The lower your credit score, the higher the risk there is that you might default on your loan. Lenders assess this risk by charging a higher interest rate. This can make getting a VA loan with bad credit more challenging for two reasons:

Lender closing costs are capped at 1% of your loan amount. If your interest rate comes with discount points due to a low credit score, the total costs may exceed VA’s 1% limit on total lender fees. If that’s the case, you may not qualify for VA financing.

VA refinance loans require a 36-month breakeven on closing costs. In order to qualify for a VA refinance, the lender must prove you’ll recoup your closing costs within 36 months, known as the break-even point. Breakeven is calculated by dividing your total costs by the monthly savings. If high discount points assessed due to bad credit put you beyond this time frame, you may not be eligible for a VA refinance.

How VA bad credit loans compare with other loan programs

The table below highlights the differences in VA credit standards versus other popular home loan programs, such as conventional loans, FHA loans insured by the Federal Housing Administration and USDA loans backed by the U.S. Department of Agriculture:

*Although the VA doesn’t require a minimum score, many VA-approved lenders set it at 620

VA loans and your CAIVRS history

The Credit Alert Interactive Verification Reporting System (CAIVRS) is a database lenders use to check for any defaults on federally assisted loans. The information is collected based on overpayments for education benefits, disability benefits or VA foreclosure claims.

You may have a hard time getting approved for a government-backed mortgage if your CAIVRS history isn’t clear. However, VA lenders might be able to make an exception if a delinquent account has been brought current, or you’ve made on-time payments as part of a repayment arrangement.