VA Loans and Bad Credit: Bridging the Gap to Homeownership

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ByChristopher Boston
Edited byJonathan Ramos
ByChristopher Boston
Edited byJonathan Ramos

Updated: November 17, 2023

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The VA loan program is a unique offering for veterans, active-duty service members and select military spouses, easing the path to homeownership for many. It comes with benefits like no down payment and no private mortgage insurance. Veterans with a less-than-ideal credit history might feel discouraged. However, obtaining a VA loan with bad credit is certainly achievable.

It's always smart to have a good grasp of the credit requirements and compensating factors that can lead to a loan approval. Beyond simply explaining what a bad credit score is, we also covered how to navigate the VA loan process with a less-than-perfect credit standing and what steps borrowers can take to get better loan terms.

What Is a Bad Credit Score?

The average credit score in the U.S. has steadied at 716 since 2021, as per FICO's data. Let’s use it as a reference point regarding bad credit scores. Typically, a score below 670 is considered fair or poor. When your credit standing worsens, it impacts your borrowing capabilities. Lenders may see you as a risky borrower, often leading to higher interest rates or even loan denials. Here are some common reasons for bad credit:

  • Late payments or missed payments
  • High credit card balances
  • Defaulting on loans
  • Bankruptcy or foreclosure
  • Lack of credit history

Understanding the possible causes of a bad credit score is the first step to improving it. Fortunately, unlike traditional lending channels, VA loans give borrowers with less-than-ideal credit histories a better chance at homeownership.

Credit Flexibilities for a VA Loan

Knowing how VA loans stand apart from other mortgage options can be a game-changer. It can help you leverage its unique benefits to your advantage, especially if your credit is a concern. Here’s why VA loans cater to a broader range of credit profiles.

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    Minimum Credit Score

    Unlike other mortgage types, VA loans don't have a strict credit score requirement. Although lenders may have their own eligibility criteria, the VA's lenient guidelines provide an opportunity for borrowers with lower scores.

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    Bankruptcy

    While many loan types require a lengthy wait post-bankruptcy, VA loans have shorter waiting periods, making the road to homeownership shorter post-financial hiccups.

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    Foreclosure History

    Similar to bankruptcy, the VA is more forgiving if you have a foreclosure on your financial record, reducing the wait time to apply for a home loan.

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    Credit History

    A limited credit history won't necessarily keep you from securing a VA loan. The focus is often on your recent financial behavior.

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    Residual Income

    This unique VA guideline looks at the income left over each month after paying major expenses, ensuring borrowers have a cushion.

The VA loan program's flexible credit guidelines can make homeownership a reality for borrowers with bad credit. With a better understanding of how your credit score and other credit facets interact with VA loan eligibility, you're better equipped to make well-informed decisions.

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HOW CAIVRS IMPACTS YOUR VA LOAN APPLICATION

CAIVRS, which stands for Credit Alert Interactive Voice Response System, is a federal database that lenders check before approving your loan application. It tracks people with delinquencies on federal debts or who have had issues with federal loans or obligations in the past. Your VA loan application process can be halted if your name appears on this list. However, if you've cleared past debts or resolved issues, getting your name off the CAIVRS list and moving forward with your VA loan is entirely possible.

Comparing VA Bad Credit Loans to Other Programs

Understanding the differences between various mortgage options can significantly impact your homeownership journey. It'll empower you to choose a loan that aligns with your financial circumstances and long-term goals. You can use this knowledge to your advantage, ensuring you secure favorable loan terms and navigate the home-buying process with confidence.

Mortgage Types
Minimum Credit Score
Chapter 7 Bankruptcy Wait Time
Foreclosure Wait Time

No set minimum, typically 620+ (set by VA-approved lenders)

2 years

2 years

500 - 580, depending on down payment

2 years

3 years

640+

3 years

3 years

620+

4 years

7 years

The table shows how lenient VA loans are, especially regarding credit score requirements and bouncing back from financial setbacks like bankruptcy or foreclosure. With the right approach, getting a VA home loan with bad credit isn’t impossible.

Can You Get a VA Loan With Bad Credit?

Can you get a VA loan with bad credit? Fortunately, the answer is encouraging. VA loans are known for their lenient credit guidelines, making them a viable option even for those with poor credit standing. However, it's essential to note that private lenders have a say in the approval process, and their requirements might vary. Various compensating factors can bolster your creditworthiness, even if your credit score is low, and could help you qualify for a VA loan.

Compensating Creditworthiness Factors

Your credit score isn't the only factor lenders consider when assessing your eligibility for a VA loan. They examine a broader financial picture to ensure you have the means to manage a mortgage responsibly. Here's how various aspects can work in your favor when aiming for a VA loan with bad credit:

  • Minimal Debt: Minimal debt lessens the financial strain on your budget, allowing for better mortgage management. Lenders appreciate borrowers who exhibit a lower debt-to-income ratio as it showcases a balanced financial lifestyle, making you a less risky candidate.

  • Stable Employment: Lenders value stability, and having a reliable source of income demonstrates your capability to meet monthly mortgage payments. Generally, a two-year employment history in the same field is preferred. Still, certain circumstances like military service or education can also be considered.

  • Liquid Assets: Lenders may view liquid assets as an advantage. It indicates that you have additional resources to cover mortgage payments if faced with unexpected financial challenges.

  • Military Benefits: Utilizing military benefits like a steady VA disability income can be favorable in the eyes of lenders. It's a reliable income source that can help offset mortgage costs, presenting you as a viable borrower despite having a lower credit score.

  • Previous Homeownership and Manageable Home Expenses: These prove to lenders that you have handled housing costs effectively in the past. A history of timely mortgage or rent payments, along with reasonable home maintenance expenses, can be reassuring to lenders. It shows you're equipped to handle the financial responsibilities of a new mortgage.

Your broader financial behavior paints a more realistic picture of your creditworthiness than just your credit score. Next, we'll delve into various VA loan options that could still be within reach, even if you have a bad credit score and how each can be a stepping stone toward homeownership.

VA Loan Options

A VA home loan with bad credit is still possible, and understanding your loan options is an essential part. Being informed about the different VA loan types helps you tailor your homeownership or refinancing strategy to your unique situation. Eligible borrowers can explore three paths: VA purchase loans, cash-out refinance or the Interest Rate Reduction Refinance Loan (IRRRL). Each option caters to different needs and financial scenarios, providing an arrow of solutions.

VA Purchase Loans

VA purchase loans are a solid choice for eligible borrowers eyeing homeownership. They follow certain guidelines, which make the home-buying process more straightforward and accessible. A benefit of VA purchase loans is the no down payment feature, which is a big relief, especially for those on a tight budget. If your credit score isn’t the best, you might wonder how to get a VA loan. The good news is that VA loans offer flexibility to borrowers with poor credit, reducing the barriers that might come with other loan types. Consulting with VA loan specialists can also get you personalized advice, aligning the loan option with your financial circumstances. Their insight can be instrumental in making your dream of homeownership a pleasant reality.

VA Cash-Out Refinance Loans

A VA cash-out refinance is a solid option that allows you to tap into your home's equity and use that cash for any purpose. It comes with potentially lower interest rates compared to other loans. This option can be advantageous in scenarios like tackling high-interest debt, home improvements or even funding educational pursuits.

If your credit score is less than ideal, obtaining a VA cash-out refinance involves showcasing other financial strengths to lenders, like steady income or low debt. This route can pave the way to improved financial stability, offering a breath of fresh air in managing your finances. Moreover, by securing a VA cash-out refinance and making timely payments, you have an excellent opportunity to improve your credit score over time.

VA Interest Rate Reduction Refinance Loans (IRRRLs)

The IRRRL VA loan, or Interest Rate Reduction Refinance Loan, is excellent for reducing your monthly mortgage payments through refinancing at a lower interest rate. Its streamlined process requires less paperwork and often results in faster closing times compared to other refinance options. You’re likely to see a reduction in your monthly payments with a lower interest rate, easing your financial load.

The eligibility criteria for IRRRLs are straightforward: you need to have an existing VA loan and aim to refinance into a more affordable loan term. It's equally important to grasp the aspect of VA loan closing costs, which will further equip you with the knowledge to navigate the refinancing journey.

Bad Credit and VA Closing Costs

VA loan closing costs are the final fees and charges incurred at the end of the home-buying process and are typically paid by the buyer. However, VA guidelines allow sellers to contribute towards these costs. Here's how having bad credit could impact your VA loan closing costs:

  • 1% Cap: The VA permits lenders to charge up to 1% of the loan amount to cover certain closing costs, known as the loan origination fee. For example, on a $200,000 loan, the lender could charge up to $2,000. If you have bad credit, lenders might be more inclined to charge this fee to mitigate the risk associated with lending to you. It covers costs like processing and underwriting fees, which are part of the lending process.

  • 36-Month Breakeven Period: The VA's 36-month recoup requirement is indeed a crucial guideline for IRRRLs. It stipulates that the reduction in the monthly payment must allow you to recoup refinancing costs within 36 months, ensuring that the refinance presents a real financial benefit to the borrower. If the recoup period goes beyond 36 months, it may not adhere to the VA's guidelines, potentially affecting your eligibility for an IRRRL. It underlines the importance of understanding the financial implications and the VA's guidelines when considering an IRRRL, especially if you have bad credit, which might affect the interest rate you are offered.

With the right strategies, tackling VA loan closing costs with bad credit can become manageable. However, it's best to discuss these with lenders to understand the full scope and seek opportunities to reduce these costs.

Tips to Improve Your Credit Score for VA Loans

Having a better credit standing can earn you more favorable loan terms, including lower interest rates, which can save you a significant amount over the life of your loan. Here are some strategies to improve your credit score for better VA loan terms:

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    Review Your Credit Report

    Obtain free copies of your credit report from the three major credit bureaus. Look for errors or inaccurate information — these could drag your score down — and dispute them if necessary. A cleaner credit report can reflect positively on your score.

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    Pay Bills On Time

    Your payment history plays a significant role in determining your credit score. Ensure you pay all your bills on time. Setting up an automatic payment schedule can help you avoid late payments.

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    Reduce Credit Card Balances

    Significant credit card balances relative to your credit limit can harm your credit score. Aim to reduce balances to at least below 30% of your credit limit.

    Avoid Opening New Credit Accounts

    Each time you open a new credit account, a hard inquiry is made on your credit report, which can temporarily lower your score.

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    Seek Credit Counseling

    If you're struggling to manage your debt, consider seeking advice from a reputable credit counseling agency. They can provide personalized advice and set up a budget and debt management plan.

It might take some time to see significant improvement in your credit score. Improving your credit requires patience and a continuous effort to educate yourself on financial management.

Frequently Asked Questions About Getting a VA Loan With Bad Credit

Our answers to these commonly asked questions aim to shed light on various aspects of obtaining a VA loan amidst credit challenges, providing a deeper understanding of the process and what can be done to enhance your eligibility.

What is the lowest credit score you can have for a VA loan?
Can I get a VA loan with a 500 credit score?
Does a lower credit score affect your VA loan interest rate?
Does a lower credit score affect your VA closing costs?
How long does it take to improve credit for a VA loan?
What are the compensating factors that can enhance my eligibility for a VA loan?
What are the different VA loan options available for bad credit holders?
Are there any tips to improve my credit score before applying for a VA loan?
What is CAIVRS and how does it impact my VA loan eligibility?
How does bankruptcy or foreclosure affect my chances of getting a VA loan?

About Christopher Boston


Christopher Boston headshot

Christopher (Croix) Boston was the Head of Loans content at MoneyGeek, with over five years of experience researching higher education, mortgage and personal loans.

Boston has a bachelor's degree from the Seattle Pacific University. They pride themselves in using their skills and experience to create quality content that helps people save and spend efficiently.


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