Getting a VA Loan With Bad Credit and Minimum Credit Score Requirements
MoneyGeek explores which types of VA loans you can get, even with a bad credit score. We also outline several strategies you can use to improve your credit standing.
A VA loan allows military members to purchase homes through a mortgage or refinance an existing one. Those on active duty aren’t the only ones qualified — veterans, surviving spouses, reservists and members of the National Guard may also be eligible.
If you're eligible for a VA loan, you can enjoy benefits such as not having to put in a down payment or needing mortgage insurance, which conventional loans typically require.
The VA doesn't require borrowers to meet a minimum credit score for VA loans. Instead, it requires lenders to review an applicant's complete loan profile.
Although the U.S. Department of Veteran Affairs guarantees VA loans, private lenders issue them. And each lender may have its own requirements. Some look for a minimum credit score of 550, while others prefer 620. Like other types of loans, a better credit score will likely give you better interest rates and repayment terms.
Active military members, veterans, reservists and surviving spouses are ideal candidates for VA loans. They can use them to purchase a home or refinance their mortgage.
The Department of Veteran Affairs does not set a minimum credit score for VA loans. However, since private lenders issue the proceeds, they may have their own requirements.
Knowing your credit score before applying for a VA loan will help you get better loan terms and interest rates.
Can You Get a VA Loan With Bad Credit?
There's no minimum credit score for VA loans from the Department of Veteran Affairs. However, lenders can set their own qualifiers — a credit score is one of them.
Each lender may have a different minimum credit score requirement for VA loans, which applies when reviewing borrower profiles. Like other loans, the better your credit score, the more likely you’ll get better rates. Remember that VA loans usually have lower interest rates than conventional loans, so a good credit score can potentially reduce your monthly payments.
However, lenders look at other factors besides your credit standing. These may include the following:
- Eligibility: Being part of the military isn’t an automatic guarantee that you qualify for a VA loan. To have eligibility, you must have also served for a specific length of time.
- Occupancy: You must use your proceeds to purchase a home you plan to live in within 60 days after closing. You must have occupied the property previously if you’re using your loan to refinance your mortgage.
- Income: All lenders need assurance that you can repay your mortgage. Your employment history and proof of income help in this area.
- Debt-to-Income Ratio: This looks at the part of your income you spend on debt repayments. The average DTI for VA loans is 41%.
You’ll notice that a down payment isn’t part of the list because VA loans don’t require one. You can get 100% of your loan financed, regardless of the amount, if you’re buying your first home.
What Credit Score Is Considered Bad?
A credit score indicates how well you’re able to manage your financial obligations, whether these are personal loans or credit card balances. Your score usually falls between 300 and 850, regardless of whether it’s from FICO or VantageScore.
Lenders take on more risk if your credit score is low — which in numerical figures is anything below 580 for FICO and 500 for VantageScore. To secure more competitive rates and loan terms, it's best if your credit score falls into the "good" range at least. That's a FICO score of between 670 to 739.
Several factors affect your credit score. For example, if you consistently pay your balances, your score increases. However, missed or late payments pull it down. A lower credit utilization ratio typically results in a higher credit score. The same applies to your credit history — the longer you've had credit accounts, the better it is for your credit standing.
Surprisingly, having different types of debt can increase your credit score. However, if you acquire a lot of new debt, that may hurt your score.
Bankruptcy and foreclosure are possible outcomes if you can't manage your debt. Both will cause your credit score to plummet, although to varying degrees.
Foreclosure pulls your score down by about 100 points. In comparison, you lose anywhere between 130 to 240 points if you file for bankruptcy, regardless of whether it's Chapter Seven or Chapter 13.
A lower credit score may make it challenging for you to find a lender. If you find one, expect higher interest rates and lower loan amounts. Besides this, based on credit underwriting you must wait two years after the bankruptcy or foreclosure was discharged before applying for a VA loan.
Why Does Your Credit Score Matter?
Remember, the Department of Veteran Affairs doesn't declare a specific minimum credit score for VA loans. However, prospective borrowers need to qualify with a private lender, which has its own requirements.
Most lenders look at your credit score when you apply for a loan, VA or otherwise. Your score tells your lender how much risk they're taking if it allows you to borrow money. The higher your score, the more you appear creditworthy, which means you're more likely to repay your debt.
Typically, a better credit score allows you to get lower interest rates. It significantly affects your finances once you begin repaying your loan. A lower interest rate, in turn, reduces the monthly amount you pay for your mortgage.
So before you apply for a VA loan, it's best to have an idea of what your current credit score is. You can even work on ways to raise your score before pursuing your application if you don't need to purchase a home immediately.
It's smart to monitor your credit report when preparing to apply for a VA loan. You can request a free copy each year from AnnualCreditReport. There are three ways to do it:
What VA Loan Types Can You Get With Bad Credit?
VA loans come in different types — purchase, interest rate refinance and cash-out refinance. The lenders' minimum credit score requirements for VA loans apply to all these. MoneyGeek provides an overview of each and explores how they work.
VA Purchase Loans
One challenge borrowers typically encounter is getting enough down payment to satisfy a lender's requirement. Fortunately, a VA purchase loan removes this problem because you don't need to make a down payment. You also don't need to have private mortgage insurance and there is no prepayment penalty.
To qualify for a VA purchase loan, ensure the following:
- You can secure a Certificate of Eligibility (COE) for VA-backed loans.
- You meet all requirements set by the VA and your lender.
- You intend to live in the home you want to purchase.
VA Interest Rate Reduction Refinance Loan (IRRRL)
Often called a streamline refinance, an IRRL is for homeowners with existing VA-backed home loans. It allows you to get lower rates, reducing your monthly payments.
You can also turn your rates from adjustable to fixed. Managing your finances becomes less complicated if you pay the same amount monthly.
To get an IRRRL, go to your lender and provide the necessary information. Remember, lenders have different processes for closing, so it's best to ask for details to ensure you don't miss anything.
VA Cash-Out Refinance
You can consider a cash-out refinance if the VA doesn't back your current home loan. However, you must still qualify for a certificate of eligibility for VA-backed home loans.
Besides using this option to refinance your loan, you can also borrow against your home’s equity. You can use the proceeds for home improvement projects, medical bills or debt consolidation.
Lenders follow varying processes to close a loan. Ensure you provide your lender with all the necessary information and documents (including your COE) and pay your closing costs.
How to Improve Your Credit Score for a VA Loan
Lenders may have different minimum credit score requirements for VA loans, but they all share one thing. A better credit standing may provide benefits that are too good to pass up. These may include better loan terms and lower interest rates.
These tips can help you increase your credit score.
Be responsible for existing debts
Nothing affects your credit score more than paying late. For FICO, payment history accounts for 35% of your score. Managing your budget well can help you make timely payments.
Maintain a low credit card balance
Another area that significantly affects your credit score is your credit utilization ratio. For example, if your credit card limit is $5,000, keep your balance below $1,500. Using more than 30% of your available credit can lower your credit score.
Avoid applying for new credit cards
Credit card issuers usually make hard inquiries when they're reviewing your application. A hard inquiry typically results in a five-point drop in your credit score (or sometimes less). However, if you apply for several cards simultaneously, the effect on your credit score can be significant.
Ensure your credit report’s accuracy
You're more likely to spot irregularities if you're familiar with your credit report's content. It's best to immediately contact the credit bureau that released the report and the establishment that provided the information if you spot any errors. Sometimes, the tiniest mistake can make you look riskier to lenders.
Clear any delinquent accounts
Having unpaid balances adds late payments to your credit history. When these become current, and you continue to manage your bills well, it'll help your credit score.
Frequently Asked Questions About VA Loans
A VA loan is an excellent home loan option for qualified applicants. You may have other questions about these, so MoneyGeek gathered the commonly asked questions about this subject to help you make an informed decision.
- AnnualCreditReport.com. "Request Your Free Credit Reports." Accessed August 14, 2022.
- AnnualCreditReport.com. "Annual Credit Report Request Form." Accessed August 14, 2022.
- Consumer Education Services Inc. "How Does Foreclosure Affect Your Credit?." Accessed August 14, 2022.
- Department of Veteran Affairs. "Chapter 2. Veteran’s Eligibility and Entitlement." Accessed August 14, 2022.
- Department of Veteran Affairs. "Chapter 4. Credit Underwriting." Accessed August 14, 2022.
- Department of Veteran Affairs. "Request for a Certificate of Eligibility (COE)." Accessed August 14, 2022.
- Experian. "What is Credit Utilization Rate?." Accessed August 14, 2022.