VA loans (backed by the Department of Veterans Affairs) are a type of loan offered to current and past service members. The VA itself does not loan the money but instead ensures a portion of it while VA-approved traditional lenders finance the loan. VA loans provide specialized programs and assistance for veterans and often have more lenient requirements for qualification than a traditional loan. From lower down payments to a higher income-to-debt ratio requirement, a VA loan can sometimes be easier to acquire and has much more attractive terms than traditional lenders when it comes to home purchases.
What is Considered Bad Credit?
There’s no agreed-upon definition of “bad” credit, as each lending agency has its own interpretation, and lenders will look at a range of scores. Credit reporting agencies typically break out credit scores into four brackets with rough scores as follows:
- Excellent: over 720, or sometimes over 750
- Good: low 700’s
- Fair: mid to upper 600’s
- Subprime: low 600’s
The VA itself does not stipulate a minimum credit score, but the lenders they work with do, and those can vary. It’s important to understand that lenders will be looking at more than just your credit score, so even if yours is in the Fair to Subprime range, it’s still possible to balance it with other factors.
Aside From The Credit Score, What Does The VA Consider?
VA loans are designed with veterans’ specific needs in mind, knowing that service members can often face greater financial hardships than their civilian counterparts. Because of this, they are open to using other pieces of your financial history to use as collateral for your creditworthiness. Other areas they might consider include:
Rent and Mortgage History
This is almost always looked at in addition to a credit score. Whether you are purchasing a home or refinancing, if you can show 12+ months of on-time rent or mortgage payments, it can help counteract a lower credit score.
Latest 12-month Payment History
In addition to rent and mortgage payments, lenders will also look at ongoing payments such as student loans, car payments, or credit card debt. They’ll want to see that you have made consistent payments over a 12-month history, with no missed or late payments.
For Those With Foreclosures and/or Bankruptcy
It’s still possible to qualify for a VA loan if you’ve gone through a bankruptcy or foreclosure. If you’ve gone through Chapter 13 Bankruptcy you’ll have to show at least 12 months of on-time payment history to be considered. With Chapter 7 Bankruptcy, you’ll have to show at least 24 months of on-time payment history. In general, you’ll have to wait two years after a foreclosure to apply for a VA loan.
CAIVRS is the Credit Alert Interactive Verification Reporting System. This system looks at your loan status with any past federally-assisted loans. If these are not paid up to date, you may not qualify for a VA loan. This entity is separate from a traditional credit reporting agency as it does not pull data from private lenders like credit cards or auto loans, and instead looks at things like SBA loans, Dept. of Education loans, and DOJ judgments.
VA Loans You Can Get With Bad Credit
Even with bad credit, it’s still possible to qualify for a VA loan. It will be more difficult, and there are specific circumstances you’ll want to be aware of:
Home Purchase Loans With No Down Payment
It’s harder to get a home loan with no down payment when you have bad credit. In general, you will need a score of around 640, but depending on your VA entitlement fund, you may still be able to qualify with a lower score. The VA insures your loan to lenders in the event that you default or go into foreclosure. The amount they insure is called the entitlement. Typically lenders will approve a no-down-payment home loan if the total loan amount is within four-times the entitlement (Example: your entitlement is usually 36K, so you could qualify for a 144K loan with no down payment). The specialists at Hero Home Programs will be able to help request a certificate of eligibility to determine your exact amount.
Refinancing loans are looked at the same way as a new purchase loan in the eyes of a lender, but there are a couple of things you’ll need to consider when applying for a refinancing loan with poor credit:
- Lenders may increase closing costs to offset a lower credit score, and the VA caps closing costs at 1% of the purchase value. For example, if you are borrowing 200K and your closing costs exceed $2,000, you may not qualify for VA financing.
- If closing costs are rolled into the loan, you must reach your break-even point—the amount you save each month by reducing your monthly payments covers the total closing costs—within 36 months. If you are significantly out of this time frame, you may not qualify.
VA IRRRL, short for Interest Rate Reduction Refinance Loans, are only for refinancing and not purchasing and are available only through the VA. With this type of loan, you don’t need an appraisal but will need to show 12+ months of on-time mortgage payments. You are also able to roll the closing costs into the loan amount reducing your out-of-pocket costs.
Can You Get a VA Home Loan With a 500 Credit Score?
The bottom line is, yes, you can get a VA home loan with a low credit score. Will it be more difficult? Yes, but don’t let bad credit stop you from looking into a VA loan. There are structures in place to help, and you may be surprised at what you’re actually eligible for. The specialists at Hero Home Programs™ will help you find the local lenders, grants, and rebates to get you into the home you deserve, even with bad credit. Book for a consultation today and start down the path to homeownership tomorrow.