VA loans make it possible for many Veterans to pursue homeownership. Two big advantages of VA loans are competitive interest rates and no down payment requirements.
But what if you have bad credit or negative marks like a bankruptcy or foreclosure on your record? Is it still possible to get a VA loan with a less-than-perfect credit history?
If this is the case, we have some good news. Mortgages backed by the VA are fairly flexible for borrowers with flawed credit — it just may take a little extra work to qualify. Let's look at how it works and what you can do to increase your chances of getting a VA loan, even with bad credit.
What is Considered Bad Credit?
The term “bad credit” gets thrown around a lot, but what exactly does it mean? There is no hard and fast rule for what lenders will consider poor credit. Most lenders will look for a credit score of 620 or higher, but each will have its credit benchmarks, so it’s a good idea to set expectations early on in the process.
Can You Get a VA Loan With Bad Credit?
It is possible to get a VA loan with bad credit. In fact, there is technically no minimum credit score requirement enforced by the VA.
That doesn't mean your credit is irrelevant, however. As said above, most VA-approved lenders prefer a credit score of at least 620, but you might be able to find lenders with lower minimum guidelines.
Lenders will also analyze factors such as income, debt and your history in making payments.
Bankruptcy and foreclosures are also looked at carefully by VA lenders. The good news is that bankruptcy and foreclosures are not always an immediate disqualification for VA loans.
In general, the VA understands many factors could affect your credit while in military service. You may even have a limited credit history due to your time in active duty. VA loans are designed with these realities in mind.
VA Loans After Bankruptcy or Foreclosure
If your credit report has blemishes, such as a bankruptcy or foreclosure, you may be especially worried that you won't qualify for a VA loan. However, it isn’t an immediate disqualification on your VA home loan application, but it may require some extra work.
With that in mind, here are the general guidelines VA loan lenders will look for:
- A two-year waiting period after Chapter 7 bankruptcy discharge (compared to four years for a conventional loan)
- A one-year waiting period and proof of 12 months of payments after a Chapter 13 bankruptcy filing (compared to two or four years on a conventional loan)
- A two-year waiting period after a foreclosure (compared to seven years for a conventional loan)
Learn More: Getting a VA Loan After Foreclosure
VA Loans You Can Qualify for With Bad Credit
There are three primary VA loan options available if you have poor credit: The VA purchase loan, the VA cash-out refinance and the VA interest rate reduction refinance loan (IRRRL).
VA Purchase Loan
These VA-backed loans are designed for new home purchases. If you're applying for this type of VA home loan with bad credit, lenders may look closely at your history of the last 12 months of housing payments or other bills.
VA Cash-Out Refinance
With a VA cash-out refinance loan, credit requirements are typically the same as they would be for a VA purchase loan. Be sure to speak with your VA lender to determine if your credit qualifies.
VA cash-out refinances allow you to refinance a non-VA loan or an existing VA loan and take cash out of the equity in your home. You can use the cash to fund repairs or remodeling projects, or to pay down existing debt.
VA IRRRL
The VA IRRRL, sometimes called a VA streamline refinance, offers current VA borrowers the option of refinancing their VA loan to lower their interest rates, which can result in lower monthly mortgage payments.
The advantage for homeowners with bad credit is that the process is streamlined, meaning it doesn't require home appraisals or income documents, and credit checks for underwriting could also be waived.
You simply need to show that you've kept up with your current VA loan payments.
Applying for VA Loans With Bad Credit
For many Veteran homebuyers, the first step to applying for a VA loan is to find the right lender. The next step in the process is you’ll need to get your Certificate of Eligibility (COE), to prove you meet the time-in-service requirements, which most VA lenders can get for you.
From there, you'll need to find a lender that offers VA-backed loans. Lenders will review your credit report, tax documents, bank statements and other relevant financial information to determine whether you qualify.
To improve your chances of qualifying for a VA home loan with bad credit, be prepared to provide any additional documentation that helps explain additional issues, such as deployment or disability periods.
Important Considerations
Borrowers seeking VA loans with bad credit should be aware of important issues that could make qualification difficult.
First, having a lower credit score could result in a loan with less favorable terms. For example, borrowers with a credit score in the 700s might be offered a lower interest rate than another borrower with a credit score in the low 600s.
Second, your lender will also look at another lesser-known report that tracks your history of payments on any federally backed loans. This is known as the Credit Alert Interactive Verification Reporting System, or CAIVRS, and it will show if you've defaulted on federal debts or have federal liens in foreclosure.
Issues on your CAIVRS report won't automatically disqualify you, but might present another barrier you'll need to overcome. If you can show that you've paid off any existing payment arrangements, you could satisfy your lender.
Other Loan Options if You Have Bad Credit
It’s a good idea to be aware of all your mortgage options before settling on one. A VA loan isn't the only option for borrowers with bad credit. In fact, FHA loans have lower score qualifications — sometimes as low as 500. However, these loans have additional requirements compared to VA loans, including a down payment. Most USDA loans are available to borrowers with a credit score of at least 640, but you may be able to qualify with a lower score.
Here's a look at some mortgage options for borrowers with bad credit:
| Loan Type | Minimum Credit Score | Minimum Down Payment |
|---|---|---|
| VA Loan | No minimum though most lenders require a 620 | $0 |
| FHA Loan (with 10% down) | 500 | 10% |
| FHA Loan (with 3.5% down) | 580 | 3.5% |
| USDA Loan | 640 for automated underwriting | $0 |
Focus on Improving Your Credit Score
If you still have trouble qualifying for a VA home loan with bad credit, there is one other option: Put your loan on hold and take steps to improve your credit score. Taking six months or a year to focus on making on-time payments could create a significant boost to your credit score.
Having bad credit does make it more challenging to get a loan, but if you take the proper steps, it’s not impossible.
