Getting a VA Loan with Bad Credit | It is Not Just About Your Credit Score
Last Updated on December 14, 2022 by Luke Feldbrugge
If you are wondering about getting a VA loan with bad credit, you’re not alone. It is a common question asked by our veterans and active-duty service members. Bad credit can stop you in your tracks and make you think there’s no point in even looking for a house. Don’t give up. The VA loan system makes allowances for bad credit. What’s more, the loan policies of the Veterans Administration are designed to help you, the military professional, find ways to make a VA loan work for you.
There are a lot of reasons, and circumstances, that can create bad credit situations for military active-duty service members and veterans. Let’s take a look at some of the numbers that the VA loan program looks at when evaluating you for eligibility. In some cases they have built-in work-arounds to give loans for veterans with bad credit. In other cases, there are ways to improve your scores and credit history that can put you back on track in short order.
VA Home Loans for Bad Credit Scores: What’s in a Number?
Although you may have heard a lot of credit scores associated with the VA loan system, there are not minimum credit score requirements that the VA enforces. That doesn’t mean they don’t matter, but the fact is that the VA loan system doesn’t have any rules about low credit scores. You will see a lot of credit score numbers out there associated with VA loans, but those all come from traditional private lenders. The VA says “the VA requires a lender to review the entire loan profile.” That means the Department of Veterans Affairs is interested in the big picture of the eligibility requirements of your mortgage, not just one number.
Private Lenders or VA-Approved Lenders Role with Credit Scores
Private lenders or VA-approved lenders are part of the discussion because, while the VA approves and insures your mortgage, the private lender actually gives you the money. Consequently, private lenders are a big part of this picture, and their loan requirements tend to be stricter than a VA mortgage loan guarantee. They will typically have a minimum credit score number.
Mostly you will see the credit score of 620 as the minimum for a mortgage loan, though in some places you will see the range of 580 to 620 for an appropriate minimum credit score. Sometimes people get mixed up because Federal Housing Administration loans require a 620 credit score, and they think that the whole federal government uses that same standard.
One thing to remember when working with private lenders is, even if they allow lower scores to qualify for a mortgage, they will likely charge you a higher interest rate over the life of the loan. That can add up over a 30-year mortgage, even one guaranteed by the VA.
You also may find companies online who claim to help veterans and active duty military personnel improve their credit scores and overall bad credit. We urge caution when looking into these. Many of them hide their fees and can cost a veteran more in the long run.
Credit Alert Interactive Verification Reporting System (CAIVRS)
When it comes to your credit report, you’ve probably heard of the big three credit reporting agencies – TransUnion, Equifax and Experian. Now is a good time to familiarize yourself with CAIVRS, which is a government database that tracks liens, judgments, defaults, foreclosures and delinquent federal debt. If you are looking for a government loan – and the VA loan program is one of those – you don’t want to be in the CAIVRS system. It doesn’t technically affect your credit score, but it’s another government mortgage system to be aware of. And while the VA loan system won’t check your credit score, it will check CAIVRS.
Debt-to-Income (DTI) Ratio Plays Factor
The VA Loan system also looks at DTI, which stands for Debt-To-Income ratio, and it’s expressed as a percentage. It’s basically a number that represents what you owe each month in debts compared to your income. While the VA doesn’t enforce credit scores, it does have financial requirements around your DTI percentage. The number you will see most often is 41%. This is a requirement the VA has for private VA lenders, but it affects you because the private lender needs to enforce it.
Typical debts included in your DTI number include:
- Rent or mortgage payment
- Car loans
- Credit card monthly payments
- Student loans
Usually at the end of this list, you will see “other debts,” which is very vague. Just going to a website DTI calculator will give you a number, but this is another case where discussing your number with a professional loan officer might be a better idea.
Generally: You want a higher credit score and a lower DTI percentage.
In addition to other factors, the VA program will count your residual income when determining your eligibility for their mortgage guarantee. That is different from your DTI ratio. Residual income is how much free cash you have at the end of the month, after you subtract your monthly expenses. This calculation can help a lot when applying for poor credit VA home loans.
Foreclosures and Bankruptcy
Often, if you have a foreclosure or bankruptcy on your credit history, it takes a long time to overcome that and get conventional loans. With a foreclosure, for example, it can take seven years before you can get another mortgage. With bankruptcy, it can take up to four years.
The VA loan program, on the other hand, is a bit more forgiving. Your waiting period for a previous foreclosure is only 2 years. For bankruptcy, the waiting period varies a little:
- Chapter 7 bankruptcy gives you a 2 year waiting period.
- Chapter 12 bankruptcy is only a 12 month waiting period.
Of course, your private lender may have more stringent requirements on waiting periods. This is a case where your mileage may vary. As we mentioned before, you need to be declared eligible by the VA program as well as being approved for the mortgage by a private lender in order to get your mortgage.
The word entitlement has gotten a bad reputation in recent years, but in the VA home loan program it means something different. Your entitlement, as an eligible veteran or active duty service member, is the upper limit of what you are allowed to borrow. Your Certificate of Eligibility (COE) will list how much your entitlement is for. Some recent revisions in the policy has the full entitlement limit set at $647,000, which means the VA will insure your loan for a new home up to that amount.
That entitlement becomes a factor when you have a foreclosure in your history. You can apply for a VA loan after the two-year wait, but you also need to have room in your entitlement for that loan. An example might help here.
Let’s say you have a foreclosure on your previous home that had a $300,000 mortgage. You’ve waited the appropriate two years, and now you want to apply for a new VA loan. If you have the full entitlement, the new mortgage cannot exceed $347,000.
5 Ways for Veterans to Get Good Credit Fast
If you need to improve your credit score or credit histories, here are some tips for repairing or improving your financial situation.
- Remove any errors or inaccuracies from your credit history report. Errors happen, so go through the reports provided by the three credit reporting companies, and use their online dispute forms if you find mistakes:
- Pay all of your bills on time (early is better)
- Keep your credit card balance under 30 percent of your available credit limit
- Only open a new line of credit if you intend to use it over the long-term
- Don’t close existing lines of credit, even if you don’t use them
In terms of new developments in the credit score world, there was good news this year. Folks with a bad credit score are now allowed to include their on-time rent payments to the credit agencies to improve their poor credit scores. That means your rent can now boost your lower score.
How much can that help? TransUnion did a study back in 2017 that showed people got a higher score averaging 16 points when rent was included. That’s the average, but the increase was a lot more for people with credit scores below 620.
Homes For Heroes
To access VA loan benefits — low interest rates, no down payment and no private mortgage insurance — you need to develop a great working relationship with your mortgage broker or private lender. They are an instrumental part of creating home loans for veterans with bad credit.
When looking for a mortgage company, we can help. We have a network of more than 4,400 real estate agents and lenders nationwide. Simply sign up and we will connect you with your local Homes for Heroes specialists and they can assist you with a VA loan for your home buying journey or your refinancing needs.
When you’ve completed the process and closed on your house, we will award you a thank you check that you can use however you please – renovations, appliances, furniture, etc. This check is referred to as Hero Rewards savings, and the average amount is typically $3,000. It’s our way to show our appreciation to you for your service to our country.