Can You Get A VA Loan With Bad Credit?

How can you get a VA home loan with bad credit? Many borrowers want to know if a VA mortgage is possible with bad credit, and under what circumstances. There are several important things to know about VA home loans that will help you better prepare for your home loan application.

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VA Home Loan Eligibility Does Not Guarantee Loan Approval

One of the most important things to remember about using VA home loan benefits is that your eligibility for the VA loan program does not guarantee you a loan. All VA loan applicants are required to financially qualify the same way all home loan applicants are regardless of the type of mortgage you seek.

That means credit scores, credit history, and other financial information will be very important for the purposes of home loan approval. The VA loan rulebook states, “By law, VA may only guarantee a loan when it is possible to determine that the Veteran is a satisfactory credit risk, and has present or verified anticipated income that bears a proper relation to the anticipated terms of repayment.”

The VA does not set FICO score requirements-that is the job of the lender, so your FICO score requirements may vary from one participating lender to another. That is one reason why it is so important to shop around for a participating lender-you may find more forgiving credit requirements from one company and not another.

VA Loan Basics

 The VA does not lend money to the borrower (except for certain Native American Direct Loan transactions which may or may not be possible depending on the qualifications of the borrower). A participating lender will underwrite and issue the loan with a guarantee from the Department of Veterans Affairs.

VA loans have a no-down payment feature, but borrowers with bad credit may be required to make a down payment as a condition of loan approval; this is one example of a compensating factor the lender may allow for a bad credit borrower who seems like an acceptable credit risk but simply has some past credit mistakes that are still on the record.

VA Home Loan FICO Score Requirements

As mentioned above, the VA does not set or regulate FICO score requirements. Borrowers who have bad credit will need to first assess their FICO scores and credit history before deciding to apply for a mortgage loan.

In general, you may find that participating lenders require FICO scores in the mid-600 range for the most favorable rates and terms.

Is There A Bad Credit VA Home Loan?

Technically speaking there is no provision for bad credit home loans associated with the VA program. That does not mean that you are automatically barred from a home loan if you have less than perfect credit but it does mean you may, depending on the nature of your credit history, be able to qualify for a home loan with a bit of extra work.

What does that mean? For starters, everyone’s idea of “bad credit” is different, but in general a lender will have a hard time justifying a home loan with the best terms for borrowers with FICO scores under 600, those who do not have a solid 12 months of on-time payments on all financial obligations at application time, and those who have a foreclosure or bankruptcy on their records that has not been fully discharged or settled.

VA Home Loans For Borrowers With Low FICO Scores

Not all borrowers will be eligible for a VA mortgage; some credit scores are just too low for the lender to take a risk on. Others, who may have FICO scores at or near the low 600s may find the lender willing to work with them, especially those with marginal FICO scores who are willing to make a down payment, agree to a higher interest rate, etc.

Fixing Low Credit Scores

Borrowers with low credit scores should avoid paying third parties for dubious “credit repair” schemes. There are several things you can do yourself to improve your credit score for free.

What are these things? Work to establish a minimum of 12 months of on-time payments on ALL financial obligations. Don’t bother applying for a home loan without this 12 month payment record if you are concerned about your ability to get approved for a home loan due to credit issues. The on-time payment record will go a long way toward improving your credit scores, but it takes time.

Your debt ratio is just as important as your credit score when it comes to home loan approval. If more than 40% of your income is taken up by your monthly financial obligations, you should work on lowering that percentage long before applying for a new home loan of any kind, VA or not. Lowering your debt ratio can help improve your FICO scores.

If you carry credit card balances above the 50% mark (where your credit limit is concerned) you should work on reducing those balances below the halfway mark on all cards where possible. This not only lowers your debt ratio but also helps your credit score.

VA Home Loans For Those Who Have Experienced Foreclosure or Bankruptcy

VA mortgages are definitely possible for those who have experienced a foreclosure or bankruptcy but there are many variables that may affect the transaction. The first and most important thing to know is that in the wake of a bankruptcy or foreclosure action, there is a mandatory waiting period borrowers must sit out before they are permitted to even apply for a new mortgage.

This is known in the industry as a “seasoning period” and borrowers should know that it does NOT begin when the bankruptcy is FILED, or the foreclosure is INITIATED, but rather once the procedure has been fully discharged. That means if the home is still in the owner’s name following a foreclosure action, the seasoning period has NOT started yet and the full duration of the waiting time will apply.

This waiting period may vary in length depending on the nature of the proceeding, the lender’s standards, state law, and other variables.

VA home loan rules also state that the borrower must, during the seasoning period, work on establishing acceptable credit patterns and responsible use of credit.

VA Loan Rules And Lender Requirements

One of the most important things you should know about applying for a VA mortgage, bad credit or not, is that participating VA lenders are not all alike. The requirements for one lender may be more strict than another.

If you find a VA lender willing to work with you and your circumstances, be sure to ask what specific FICO score ranges are allowed for the loan you seek, what compensating factors may be required if your credit scores require them, and what you can do in the meantime to get a more competitive rate and terms from that lender based on specific credit requirements and financial qualifications.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News