Can I Get a VA Loan With Bad Credit?

As an active-duty service member, veteran, or surviving spouse, you may be eligible for a VA loan. But military life is challenging, and that's often reflected in your finances. It’s not uncommon for service members to struggle with their credit. So, you may find yourself asking how to get a VA loan with bad credit.

Bad credit makes any loan more difficult to obtain, but it is possible to qualify for a VA home loan with less-than-stellar credit. But keep in mind, if you are approved with poor credit, your loan terms won’t be optimal. So, the better option is to work on improving your credit before pursuing that loan. 

What Credit Score Do I Need for a VA Loan?

The Department of Veterans Affairs doesn’t set a specific credit score for eligibility, but the VA isn’t a financial institution. It’s not lending you the money to buy a home. Instead, the VA guarantees the loan. That way your lender knows it will get its money, even if you default on the mortgage.

But even with that backing, the financial institution that makes the home loan still wants evidence that you’re a satisfactory credit risk. Therefore, most lenders want to see a score in the mid-600s, but no lower than 620. Though some subprime lenders will work with scores as low as 580. Still, higher is better. A very good credit score boosts your approval odds, and an excellent score means you earn the most beneficial loan terms.   

Most lenders use the Fair Isaac Corporation score when checking on a consumer’s credit. The FICO score range is 300 to 850. Here’s how that roughly breaks down:

• Poor/Bad Credit – Below 629
• Fair Credit – 630-689
• Good Credit – 690-739
• Very Good Credit – 740-799
• Excellent Credit – 800-850

The VA may only guarantee your loan if you can demonstrate that you’re not a bad credit risk.

What Else Do Lenders Consider for a VA Loan With Bad Credit?

Your credit is far from the only thing a lender examines and considers when deciding on extending a home loan. It weighs many other factors as well, including: 

• Debt utilization ratio
• Payment history
• Employment history
• Total income and residual income
• Assets

Low debt and a good debt-to-income ratio can help offset your poor credit score. Generally, your DTI must be no higher than 41%. But you can help your approval odds by paying down your debts to lower that number.  

Another factor that bears weight is residual income. That’s the cash you have left after you pay all your bills and expenses. The VA uses Tables of Residual Income by Region to help calculate your RI. Family size and home purchase price are part of the formula.

Tables Source: U.S. Department of Veterans Affairs

Can I Get a VA Loan With No Credit?

Deployments can wreak havoc with credit establishment in the United States. If you return home ready to buy a new house with no credit history, you may still qualify for a VA loan. If available, lenders look at rent, insurance, phone bills, utility bills, and payment history to determine credit worthiness. At least one year of these types of alternative credit examples is necessary.

Can I Get a VA Loan After a Bankruptcy or Foreclosure?

Severe financial events like bankruptcies and foreclosures don’t ban eligible parties from getting VA loans. However, there are mandatory waiting periods. These are called seasoning periods. They don’t begin until the bankruptcy is discharged, or the foreclosure is closed.

In Chapter 13 and credit counseling programs, you must have 12 months of on-time payments before you can apply for a VA loan. With non-FHA loan foreclosures and Chapter 7 bankruptcies, at least two years must pass before applying. FHA loan defaults may demand longer wait times. 

You may need to wait a bit longer even after your seasoning period has elapsed. The hit to your credit can be dire, and it often takes years to rehabilitate your credit score.

How Can I Get a VA Loan With Bad Credit?

If your FICO score is below 580, you may not be able to get a VA loan, no matter what else you bring to the table. But, if your score is simply in the fair credit range, it's possible to qualify for a VA loan.

Some strict conditions are likely to apply:

• A record of at least 12 months of on-time payments
• Low debt-to-income ratio
• No outstanding collections
• Evidence of stable income — usually two years of consistent employment
• No excessive inquiries on your credit report
• No bank overdraft fees
• A down payment may be necessary

Take time to work on these things to enhance your chances of approval before applying. These steps have the added bonus of helping boost your credit score. But understand that poor credit means higher interest. 

Shop around before you apply. Do your research and investigate the criteria your prospective lenders need for VA loan approval.

How Do I Get Pre-Approved for a VA Loan?

VA loan pre-qualification is a good idea when you’re worried about your low credit score. The process can help identify issues you need to address before you can move forward with a home purchase.  

Gather your COE, pay stubs, tax returns and proof of any other income. Then, contact your chosen VA-approved lender. They’ll walk you through the process.