If you’re active-duty military, a veteran, a National Guardsmen or the spouse of an eligible service member, a VA loan can get your foot in the door and help you purchase or refinance a home. These loans are guaranteed by the Department of Veterans Affairs and offer flexible lending guidelines. Borrowers can purchase with no money down, and closing costs with a VA loan only average about 1% to 3% of the loan amount. Since sellers are allowed to pay all of a buyer’s closing costs, qualifying for a home loan with virtually no out-of-pocket cost is possible. But while a VA home loan is an excellent product, you might run into problems if you have credit issues. Here’s a look at how to get a VA loan with bad credit.
If you don’t have the best credit score, don’t immediately assume that a VA loan isn’t right for you. The truth is, these loans have lenient and flexible guidelines, so you shouldn’t have trouble finding a bad credit VA home lender. Options might include:
While some mortgage lenders may require a minimum credit score of 680 for a conventional mortgage approval, a VA home loan only requires a credit score of 620. Keep in mind that you may pay a higher mortgage rate due to your lower credit score. The upside, however, is that once your credit score improves, you can refinance to see if you can qualify for a better rate and potentially lower your mortgage payment.
But even though there are bad credit VA home loan lenders, not everyone with a low credit score will qualify. Typically, these lenders examine your credit history over the past 12 months to determine if you’re eligible.
These loans require stable income, which means at least 24 months of consecutive employment. In addition, your recent credit history must show no outstanding collections or late payments. This indicates that you’re putting forth effort to improve your credit habits.
If you’ve filed bankruptcy in the past, you must wait at least two years after a chapter 7 to qualify for a VA home loan. You must wait at least one year after a chapter 13.
Unfortunately, having no credit can be just as bad as having bad credit. You can get a VA home loan with no prior credit history. But in this case, your lender must use alternative forms of credit to qualify you. They may review your recent rental history, or use your payment history for insurances and utilities to gauge creditworthiness.
As a side note, make sure you apply for a Certificate of Eligibility before approaching a VA-approved lender. You must show this certificate as proof that you’re eligible for this type of loan.
A mortgage lender will determine how much you can spend on a house. Before meeting with a lender, however, you can use an online calculator to estimate affordability based on your monthly income and your monthly expenses.
There’s also the option of using a cosigner when applying for a VA home loan with bad credit. A cosigner is someone with good credit who basically agrees to make the mortgage payment if you default. Cosigners are useful when you don’t have a prior credit history or if you have recent dings on your credit report, but you don’t want to postpone buying a house.
This person must apply for the loan with you, sign the mortgage paperwork and the mortgage loan will also appear on their credit report. You’ll both need to submit supporting documentation with the application (bank statements, paycheck stubs, W-2s/tax returns, credit report).
Being a cosigner also increase their debt-to-income ratio, which can make it difficult for them to get approved for their own loans in the future. As a general rule of thumb, you should refinance and remove a cosigner’s name from the loan as soon as you’re eligible to get a mortgage on your own.
If you’re a disabled veteran, you can also apply for a VA home loan using your disability income. Just know that a mortgage approval isn’t automatic if you’re disabled. Rather, you’ll still need to meet VA loan approval requirements.
This includes a minimum credit score of 620 and sufficient income for a mortgage. You can use your income from disability, as well as income from other sources (self-employment, part-time work, rental income, investment income, retirement income, child support and alimony).
Homeownership might seem out of reach when you have a low credit score. But even if your score needs improving, there are plenty of programs designed to help bad credit borrowers get approved so they don’t have to postpone buying a home.