Securing a VA loan with bad credit isn't impossible, but it is common for many lenders to have a more stringent credit requirements.
Veterans and service members may have what's considered “poor” or “bad” credit and wonder if they can still use their VA home loan benefit. It’s important to understand the VA doesn't set credit score requirements. In fact, the VA doesn't mandate a minimum credit score at all.
The ability to obtain a VA loan with bad credit is determined by the specific credit requirements of each individual VA lender. Let’s take a closer look at how lenders may assess your poor credit and risk when applying for a VA loan.
Can you get a VA loan with bad credit?
The short answer is: Yes, it’s possible to get a VA loan even if you have bad credit. Since VA loans do not have a minimum credit score set by the VA, it is ultimately up to the lender and their credit score requirements.
At Veterans United, we have a 620 FICO credit score minimum in most cases. However, Veterans who aren't quite ready score-wise can work with one of our credit consultants to develop a plan to boost their credit and get on the path to loan preapproval. We offer this complimentary, no-obligation service to help Veterans achieve homeownership.
What is considered “bad credit” for a VA loan?
The first issue is tackling unclear phrases like "bad," "poor" or "less than perfect" credit. We use that kind of language since it can be tough to discern what constitutes "good" credit or at least a credit score that can get prospective buyers closer to the dream of homeownership.
Credit scoring firm FICO defines "Fair" credit as scores from 669 to 580, with anything below designated as "Poor" credit. But one lender's definition of bad or subprime credit can be very different than another's.
Across the spectrum of VA lending, a 620 FICO score is a common credit score minimum. But that benchmark can be higher or lower depending on the lender, the economic environment, how much you're hoping to borrow and more.
Bad Credit May Not Be the Only Hurdle
Veterans who've experienced bankruptcy, foreclosure or a short sale might face unique homebuying challenges beyond the hit to their credit score (which can be substantial).
These negative credit events usually come with required waiting periods, also known as seasoning periods, during which the Veteran will likely be unable to close on a home loan. The length of these waiting periods can vary depending on the event and the type of loan you're hoping to get.
Generally, VA loan waiting periods are shorter than conventional mortgage ones. But much like credit score minimums, guidelines on seasoning periods can vary by lender.
Compensating Factors for Bad Credit
If your credit score is on the lower end, VA loan underwriters may see if you meet any "compensating factors." These factors can help offset concerns and weaknesses in a buyer's loan application.
Below is a list of factors your VA lender may consider if you have poor credit:
- Minimal debt
- Long-term employment
- Significant liquid assets
- Military benefits
- High residual income
- Healthy record of previous home ownership
- Minimal increase in home expenses
Keep in mind the VA notes that compensating factors must greatly exceed what would be considered a normal program requirement.
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How to Improve Your Credit Score for VA Loans
While it isn't exactly novel (or always easy), one of the best ways to improve your credit score is simply to pay your bills on time. Your payment history is the biggest factor (35%) in dictating your credit score, according to FICO.
The second-biggest factor is how much you owe (30%), so strive to keep your credit balances at or below 30% of your total credit limit. For example, if you have a $1,000 credit limit, aim to keep your balance at or below $300. The last 35% is made up of your credit history length, new credit accounts and the types of credit.
Credit monitoring software can help you identify errors in your report and keep closer tabs on your basic scores. Just know that the scores you see from apps and tools will likely differ from those of mortgage lenders. Their scores are weighted specifically for mortgage lending.
You can also get free copies of your credit report from AnnualCreditReport.com.
One thing to be leery of is businesses claiming credit repair in exchange for payment. Veterans and service members can find plenty of free resources and credit education online.
VA Loans and Bad Credit FAQs
Can I get a VA loan with a 500 credit score?
Generally, yes, this may be possible. Typically, VA lenders look for a credit score of around 620, but a lower score may be approved with compensating factors. The VA does not set a minimum credit score to qualify for a loan, so credit score minimums will vary by lender and other factors.
Does a lower credit score affect your VA loan interest rate?
A lower credit score can have an impact on the interest rate lenders quote. Lenders typically view higher credit scores as indicative of lower risk, often leading to more favorable interest rates. Therefore, lower scores may result in higher rates. Generally, the impact of your credit score on your rate is more pronounced with conventional mortgages than VA loans.
Does a lower credit score affect your VA closing costs?
Your credit score may affect closing costs if you purchase discount points. If your poor credit leads to an increased interest rate, considering discount points to decrease the rate might be a good idea. Rolling points into a VA loan for a new home purchase is not permitted, so you would need to have cash on hand to cover these costs during the closing process.
Are there specific VA lenders for bad credit?
Some lenders might market themselves as options for "bad credit" loans or "VA lenders for bad credit." Take a closer look at the costs, fees and fine print in these cases. Veterans may end up paying more for being deemed a higher risk with poor credit. Improving your credit score and talking to a VA lender about your situation is highly recommended. Veterans United has a credit consulting team that can help Veterans build up their credit if their score is lower than 620.
How long does it take to improve credit for a VA loan?
This depends on the shape of your credit and what negative events are impacting your score. Some Veterans who’ve encountered bankruptcy or foreclosure may need to wait a required amount of time before applying for a VA loan. Typically, at least a couple of years, but the length of time heavily depends on your specific situation.
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