Sometimes life happens and can cause a huge drop in credit scores. Though the drop doesn’t take long, building credit scores back up can take what feels like—a lifetime. But, just because you hold a bad credit score, doesn’t mean you can’t use a VA loan for a home purchase. So, can you get a VA loan with bad credit?
The answer is “yes, it’s possible”, but it’s going to depend on the lender. The guideline for credit scores for VA loans is 640, but it’s also the lender’s decision on if they want to accept credit scores below that threshold.
How to Get a VA Loan?
Your chosen lender will look at several factors to determine if you can use a VA loan. They consider things like income, assets, employment history, and credit card payment history before making a final decision. If you’ve been able to make on-time credit card payments for the last twelve months, this will help with getting approved for a VA Loan. On top of these requirements, there are eligibility conditions that a borrower must meet.
Although VA loans are known for being no-down-payment, this is dependent on your credit score and lender. Borrowers with lower credit scores may have to make a down payment to be considered for a VA Loan. Down payments can make VA loans an acceptable credit risk when dealing with lower credit scores.
It’s important to note that not all lenders are created equal. Some lenders will only accept mid-600 and above credit scores—while others will accept lower. That’s why it is important to shop around and compare lenders.
How Do I Fix a Low Credit Score?
Be careful when considering credit repair agencies. Though some are helpful, there are lots of scams out there, so it’s important to vet any company that you’re considering using. For tips on improving your credit, you can also check out ADPI’s Credit Report Guide.
Keep tabs on your debt ratio, as well. This factor is just as important as a credit score. By lowering your debt ratio, lenders will be more likely to take a risk on you as a borrower. Debt ratio and FICO scores go hand-in-hand – if you improve your debt ratio, your FICO score can improve too!
Getting a VA Loan After Foreclosure or Bankruptcy
The VA has a 2-year waiting period following a Chapter 7 bankruptcy or post-closing foreclosure. Though this may seem long, it is half as long as the four-year waiting period required for conventional loans. If a borrower has filed a Chapter 13 bankruptcy, the VA will consider borrower qualification if there have been 12 months of on-time payments.
What if you’ve had a foreclosure on a previous VA home? Believe it or not, there is some flexibility there too. Borrowers may be able to do another no-down-payment VA loan if there is still entitlement remaining on their certificate of eligibility. A trusted lender can tell you how much is left on your COE.
What If I Have No Credit?
If a veteran is returning from a deployment and has limited/no credit history, it’s not a deal-breaker for the VA. VA lenders can consider factors such as rent, utilities, and auto insurance payments to determine if a borrower is a good fit for a VA Loan.
Which VA Loans Can I Get with Bad Credit?
VA Purchase Loan
The major advantage to VA Loans is not having to do a down payment with purchasing a home. Even if your credit score is low, lenders will take a close look at your payments over the last 12 months.
VA IRRRL (Interest Rate Reduction Refinance Loans).
If you’ve been able to make payments on time for the last 12 months, you may be able to do a VA IRRRL. With this type of loan, appraisals and income documents are not required. Also, any closing costs can be rolled into the loan.
VA Cash-Out Refinance
With VA Cash-Out Refinances, you can pull out 90% of your home’s equity. This money can be used to pay off high-interest accounts, make home improvements or renovations, or whatever else you need it for. If you use it for paying down high-balance credit cards, it could benefit you by improving your credit score!
Will Bad Credit Affect My Interest Rate?
Depending on the score, your credit score may affect your VA Loan interest rate. Because lower scores are higher risk, lenders may increase the loan interest rate to help mitigate that risk. The good part is that VA loans have some of the lowest interest rates offered, so even with an increased rate, you may be getting a great deal.
Having a poor credit score can be difficult and disappointing, but it doesn’t have to be the end-all to your dream of owning a home. Be sure to check with ADPI’s in-house lending team to discuss options for lower credit scores. They’re happy to help!
