How to Get a VA Home Loan with Bad Credit

bad credit va home loans

VA loans are one of the greatest benefits offered to our Nation’s Veterans.

The come with no money down and no PMI.

It’s a great deal.

If you have imperfect credit you may be wondering if you can get a VA home loan with bad credit.

In this article we’ll answer that question and more..

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How VA Loans Work

There is a common misconception that the Department of Veteran Affairs issues the home loans. In fact, they do not lend money they simply guarantee the mortgage. Working more like an insurance policy on the loan itself. If a borrower defaults on a VA loan the Department of Veterans Affairs will pay the lender the remaining loan balance.

VA home loans are the cheapest type of mortgage available today. They offer 100% financing and require no mortgage insurance, savings Vets thousands of dollars a year on PMI alone.

Closing costs are lower than typical loans and so are the mortgage rates. There’s no doubt that if you’re a Veteran that a VA loan is the best type of mortgage for you.

Bad Credit VA Home Loans

The Dept. of VA does not have a minimum credit score required for them to guarantee a mortgage. As long as the lender is willing to fund the loan the VA will back it. The minimum credit score for VA loans will depend on the mortgage company.

In general the majority of lenders will require a 620 score. While other lenders may be willing to offer bad credit VA loans. If one lender turns you down, you should keep trying with other VA lenders.

VA Loan Requirements

  • No late payments in past 12 months
  • Maximum DTI ratio 43% (50% DTI in some cases)
  • 2 years provable income
  • W2’s and tax returns
  • 2-3 months of bank statements
  • 2 months of mortgage payments in reserves

Can You Get a VA Loan with Bad Credit?

Your score is not the only thing lenders see when they look at your score. Late payments, collection accounts, and the amount of debt you have are all closely looked at and considered. All credit scores are not created equal.

Someone with a 580 score but no late payments or collections in the past 12 months is viewed much differently than someone with a 620 score and multiple recent late pays. The actual minimum score for VA mortgages will vary lender to lender.

Navy Federal Credit Union is also a source for VA loans with poor credit.

Compensating Factors

Compensating factors are factors that make up fora borrowers poor credit history. Anything that helps elevate your borrowing potential such as a low debt-to-income ratio, or a large down payment (low loan-to-value ratio) will increase your odds of getting approved for a mortgage with a poor FICO score.

List of compensating factors

  • Large down payment
  • High income
  • Length of time at current employer
  • Low amount of debt

Other Home Loans for Bad Credit

VA loans are without question the best type of mortgage loan. But, some people have credit scores too poor to qualify for VA.

The good news is that there is a mortgage program that allows for bad credit scores. FHA loans are one of the more popular types of home loan products used today. And the best type of loan for people with low credit scores.

FHA Loan Credit Guidelines

FHA loans have a low credit requirement of just 500 with a 10% down payment. If you have at least a 580 credit score you may qualify for FHA with just a 3.5% down payment. This is an alternative option for people who cannot get approved for a VA loan.

Yes, you will need a down payment for FHA but that goes towards the principle balance anyway. You can also refinance your FHA loan into a VA loan down the line when your score improves.

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