Finance

Getting a VA Home Loan With Bad Credit

April 20, 2022

As a former service member, you’ve made a serious commitment to your country. A VA home loan is one of the ways your country makes a commitment to you.

In short, a VA home loan is a type of mortgage loan guaranteed by the office of Veteran Affairs. This means the government will step in to help you should you default on your loan.

However, if you have bad credit, you might be concerned about your eligibility for a VA loan program.

Qualifying for a VA home loan with bad credit is still possible. In this guide, we’ll cover all you need to know about VA loans for bad credit.

Can I Still Get a Veteran Affairs (VA) Home Loan With Bad Credit?

The short answer is yes. The long answer is that it’s tricky.

This is because the process for securing a VA goes through two entities: the federal government and a specific VA lender.

When you apply for a VA loan, you’re effectively asking the government to guarantee a loan—not provide the actual money. As a result, the government doesn’t have a minimum credit score limit.

That said, specific VA lenders do usually have a cut-off credit score. This means that while the government will approve your VA loan, the mortgage lender may not.

With this in mind, let’s take a deeper look at the impact of credit scores.

What is the Lowest Credit Score You Can Have for a VA Loan?

Just as military branches have different requirements, so too do lending agencies when it comes to credit scores.

However, while a universal credit score cut-off doesn’t exist, lending agencies will hesitate to approve you if your score is too low.

In general, a low credit score is a score that falls below 620. Here are the credit score levels:

Superior (800-850) – A superior credit score signifies an exemplary credit history. Getting approved for a VA loan with superior credit is a near certainty (depending on other factors in your financial profile).
Very good (740-799) – If you have a very good credit score, you probably won’t have a problem qualifying for a VA loan. However, you may not receive the favorable interest rate you would receive if you had superior credit.
Good (660-739) – Assuming stable income and other qualifications, people with good credit can qualify for most VA loans. That said, you may not receive the lowest interest rates.
Decent (590-659) – While a decent credit score doesn’t signify that you have a terrible credit history, it also doesn’t point to an immaculate one. To find a VA lender, you may have to do some shopping around.
Poor (300-589) – If you have poor credit, you’ll have to really put in the effort to secure a VA loan. This is because lending agencies will view you as a risk and hesitate to approve you.

While credit scores lower than 620 will make it more difficult for you to secure a VA loan, there are a few ways to improve your chances significantly.

There are even VA loan alternatives that don’t just look at your credit score—more on that later.

Ways to Secure a VA Loan With Bad Credit

Just because you have a credit score lower than 620 doesn’t mean you have to squash your dream of financing your home via VA loans.

Here are a few ways to turn your dream into a reality.

1. Boost Your Credit Score

Boosting your credit score is one of the most straightforward ways to improve your chances of qualifying for a VA loan.

To improve your credit score, consider doing one or all of the following:

Pay bills on time
Handle collections accounts
Diversify your credit

Boosting your credit score by even 20 points could pay dividends.

2. Shop Around for Lenders

Shopping around for lenders helps you get the best interest rate possible. If one lender turns you down, simply move on to the next one.

While this process may take more time, you have a better chance of securing a VA loan if you approach several lenders.

3. Divulge Disability Status (if Applicable)

When it comes to qualifying for VA loans, it’s important to be as open and honest as possible with both the government and VA lenders.

For example, you shouldn’t hide your disability status. This is because you may qualify for additional benefits if you’re a disabled veteran.

Divulging your disability status can help you in two ways:

VA funding fee exemption – If you’re a disabled veteran, you’ll be exempted from paying the VA funding fee on your VA loan. The VA funding fee is a fee paid directly to the VA for the loan.
Disability income – In addition to credit score, most lenders will look at your income when deciding whether or not to approve you for a VA loan. Your disability income will raise your total income, making you less of a risk in the eyes of lending agencies.

Home loans for disabled veterans with bad credit are definitely out there. You just need to divulge the required information and thoroughly explore programs and lenders.

VA Loan Lenders & Options for Bad Credit

The good news is that there are many VA loan lenders and options for poor credit.

Let’s take a closer look at several of these VA loan lenders for bad credit before diving into VA loan alternatives.

1. Freedom Mortgage

A VA loan lender committed to working with veterans with a low credit score, Freedom Mortgage is appealing for two primary reasons:

Low qualifying credit score – Unlike most lenders that place a premium on a 620+ credit score, Freedom Mortgage only requires a lower credit score of 580 or above. This can be a serious boon for veterans with bad credit.
Streamline refinancing – Streamline refinancing makes it easier for veterans to qualify for VA loans. Streamline refinancing programs usually entail better interest rates and terms, no income verification, and low funding fees.

While Freedom Mortgage makes it easy for veterans with bad credit to qualify for loans, there is one downside: a minimum downpayment of 3%.

2. New American Funding

New American Funding knows your credit score doesn’t give the entire picture when it comes to your financial stability.

Unlike many lending agencies, they look at “nontraditional credit.” Nontraditional credit includes the following:

Utility bill payments
Rental payments
Any payments not reported to credit agencies

This makes New American Funding a popular choice for veterans who may not have immaculate credit.

New American Funding is also popular for the following reasons:

Availability – With branches in 31 states, New American Funding makes it easy for many people to take out a VA loan. They also have bilingual agents.
First-time homebuyer programs – If you’re a first-time homebuyer, you, as a potential borrower may not have the credit necessary to secure a traditional home loan. Fortunately, New American Funding has programs geared to help first-time home buyer veterans.
Low qualifying credit score – Like Freedom Mortgage, New American Funding has a 580 credit score requirement.

However, like Freedom Mortgage, a 3% minimum downpayment is the downside.

3. PenFed Credit Union

While Freedom Mortgage and New American Funding are possible avenues for veterans with poor credit, PenFed Credit Union is better for veterans whose credit is fair to good. This is because, in addition to nixing lender fees, PenFed offers many discounts.

Other reasons PenFed stands out include:

Commitment to financial literacy – PenFed knows that securing a VA loan is only half the battle. To truly thrive, veterans must also have financial literacy. By partnering with Wounded Warriors, PenFed helps veterans understand their loans—especially a VA home loan program for disabled veterans with bad credit.
Competitive rates – Because PenFed is a credit union, they’re able to offer lower interest rates than many of their competitors.

There’s a lot to love about PenFed. However, prospective borrowers should note that the agency requires a minimum credit score of 620.

Alternative Options for Bad Credit

If you’re still having a difficult time securing a VA loan, it may be wise to turn to a home equity loan alternative or other loan options for bad credit.

Here are two alternatives:

FHA Loan

Issued by the Federal Housing Administration (FHA), FHA loans are designed to help first-time home buyers and borrowers with bad credit.

That’s because they allow borrowers with credit scores ranging from 500 to 579 to secure a loan with a 10% down payment.

If you have the necessary funds for a downpayment, an FHA loan may be more suitable than a VA loan.

Sale-Leasebacks

Are you concerned about taking on more mortgage debt? After all, missed payments could further impact your credit score.

If you’re a current homeowner trying to find out how to buy second home with bad credit, an investment property, or even a vacation pad, there are several ways to convert your home equity with bad credit.

Through sale-leaseback programs, you can convert your equity to cash, allowing you to:

Pay off debt
Move to a new home
Prepare for retirement

How you use your funds is up to you.

Bad Credit? Choose a Loan Alternative.

When it comes to securing a VA loan, bad credit can throw a serious wrench into your plans.

Loan alternatives such as sale-leaseback programs make it possible for you to receive the funds you need—even if your credit score is less-than-ideal.

You’ve done a lot for your country, and you deserve financial flexibility to plan for your future.

Key Takeaways

If you are seeking a loan from the office of Veterans Affairs but are concerned about having bad credit, there are a few options you can consider to increase your chances. If you shop around for different lenders and attempt to boost your credit score but are still struggling, there are alternative financial solutions including FHA loans and sale-leasebacks for you to consider. When in doubt, consult a financial advisor to help you figure out what path is best for you.

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