Can You Get a VA Home Loan with Bad Credit?

If you’re a military borrower, getting approved for a VA loan with bad credit is possible, regardless of any blemishes in your financial history. The U.S. Department of Veterans Affairs (VA) will even guarantee mortgages for veterans who have overcome a previous bankruptcy or foreclosure.

Is it possible to get a VA loan with bad credit?

Yes, you can get a VA-backed low-credit-score home loan. The VA itself doesn’t set a minimum credit score, so credit requirements are set by the lender (more on that below). However, the VA does insist that lenders scrutinize the last 12 months of payment history listed on your credit report.

Because the VA recognizes that service members face financial challenges that civilians don’t, most VA loan requirements are fairly flexible.

What is the minimum credit score for a VA loan?

Many lenders set a 620 minimum, but borrowers with scores in the 500s, don’t despair — you can shop around for a lender that’s willing to meet you where you are. Rocket Mortgage, LendingTree’s pick for the best overall lender for VA loans, accepts scores as low as 580. But of all the VA loan lenders we reviewed, the one willing to go the lowest was Carrington Mortgage Services, which only requires a 500 credit score.

Can you get a VA loan with no credit?

Veterans returning from deployment may not have enough payment history for a traditional credit score. In that case, VA lenders can use rent, utility, car insurance and other payment histories to make an approval decision. In fact, VA underwriters consider your housing payment history to be one of the best indicators of whether you’ll be responsible with a new home loan.

  Interested in VA mortgage lender reviews? View our top picks for the best VA mortgage lenders.

Getting a VA loan after bankruptcy or foreclosure

After bankruptcy or foreclosure, most lenders enforce a waiting period before you can get another loan. This is also true for VA loans, but the mandatory waiting periods can be far shorter than you’ll find with most other loan programs.

Getting a VA loan after bankruptcy

• 2-year waiting period after a Chapter 7 bankruptcy. The VA is sensitive to service-related issues that may lead to bankruptcy filings. Military borrowers have to wait just two years from their bankruptcy discharge date to apply for a new VA loan (compared with four years for a conventional loan).
• 12 months of payments after a Chapter 13 bankruptcy. VA borrowers who’ve made 12 on-time monthly payments as part of a Chapter 13 bankruptcy or credit counseling program may qualify for a new VA loan.

Getting a VA loan after foreclosure

• 2-year waiting period after a foreclosure. Military borrowers who lost a home to foreclosure are eligible for a VA loan two years after the foreclosure is finalized.
• VA foreclosure flexibility. VA borrowers can take out a new VA loan, even with a foreclosed VA loan on their certificate of eligibility (COE). If you have enough VA loan entitlement remaining, you may be able to buy a new home with no down payment.

 Read more about how to get a VA loan in 5 steps.

How a VA home loan for bad credit stacks up against other loan programs

The table below compares VA credit standards with other popular home loan programs including conventional loans, FHA loans (insured by the Federal Housing Administration) and USDA loans (backed by the U.S. Department of Agriculture).

*Although the VA doesn’t require a minimum score, many VA-approved lenders set it at 620

VA loans and outstanding federal debts

The Credit Alert Interactive Verification Reporting System (CAIVRS) is a database lenders use to check whether you’ve ever defaulted on federal debt — like VA, FHA or USDA loans or federal student loans — in the past. CAIVRS will also show if you’ve failed to pay child support or other court-ordered payments. These types of debt often won’t show up on a credit report, which is why the VA requires a CAIVRS check.

You may have a hard time getting approved for a government-backed mortgage if your CAIVRS history isn’t clear but, even if it isn’t, you aren’t automatically disqualified. VA lenders might be able to make an exception if a delinquent account has been brought current, or you’ve made on-time payments as part of a repayment arrangement.

Key VA loan requirements: Which are flexible?

Credit score: No set minimum

  Flexible

As we covered above, VA loans have built-in flexibility that allows you to compensate for factors like low credit, no credit, bankruptcy or foreclosure with alternative documentation or compensating factors. You may qualify for a VA home loan with bad credit if you have enough extra room in your budget each month.

Debt-to-income ratio: 41% maximum

  Flexible

Your DTI ratio expresses what percentage of your gross monthly income goes toward debts, including the home loan you’re applying for. If your DTI exceeds 41%, you can still get a VA loan as long as:

• Your DTI is high because you have significant tax-free income.

• You can compensate for a high DTI with around 20% more residual income than is normally required.

Residual income

  Flexible

The VA uses a metric it calls residual income to assess how much free cash you have each month after subtracting your monthly expenses, including home maintenance. Residual income requirements are based on your location and family size. If you can’t meet the minimum amount of residual income required, you might be able to work around this by:

• Getting a family member excluded from your residual income calculation.

• Proving that you receive significant benefits based on your military service status.

Here’s when VA loan requirements may be flexible

The VA encourages lenders to evaluate each borrower’s situation individually, which means most VA loan requirements are flexible.

One way you can help your case is by presenting what are called compensating factors. These are strong aspects of your financial situation that help counterbalance any weak points in your application and include:

 See current VA loan rates today.

When VA loan requirements aren’t flexible: VA closing costs and bad credit

The lower your credit score, the higher the risk that you might default on your loan, which translates to a higher interest rate. This can make getting a VA loan with bad credit more challenging for two reasons:

→  Lender closing costs are capped at 1% of your loan amount. If you have low credit, some lenders may only be willing to make you a loan offer that includes discount points. However, the VA sets a 1% limit on total lender fees and the cost of points can push you over the limit. If a lender isn’t willing to make you a loan offer with fewer points, you may not qualify for VA financing.

→  VA refinance loans require you to break even on closing costs within three years. When you’re applying for a VA refinance, your lender must prove you’ll reach your break-even point (i.e. recoup your closing costs) within 36 months. If your break-even point takes longer than three years because your lender requires discount points, you may not be eligible for a VA refinance.

 Find out how much you can afford using our home affordability calculator.

Types of VA loans you can get with bad credit

VA purchase loans

VA borrowers buying a house with bad credit may be eligible for no down payment and no mortgage insurance (a type of insurance charged on most home loans if you make less than a 20% down payment). If your credit scores are low, lenders will pay close attention to how you’ve paid your rent and other bills in the past 12 months.

VA cash-out refinance loans

Homeowners can use a VA cash-out refinance loan to convert their home equity into cash for home improvements, debt consolidation or any other purpose.

VA interest rate reduction refinance loans (IRRRLs)

Borrowers with a current VA loan only need to prove they’ve made their payments on time over the past 12 months to be eligible for a VA IRRRL. Even if you were 30 days late on a recent mortgage payment, your lender may still approve an IRRRL by submitting your loan directly to the VA for approval. You’re not required to get a home appraisal or provide income documentation, and can also roll your closing costs into the loan amount.