Generally speaking, having poor credit automatically renders you ineligible for a home loan. Mortgage lenders will evaluate your credit report and decide whether you qualify for a loan based on the strength of your credit score.
However, the VA home loan is not a regular loan. It is a government-backed loan specifically for active-duty and retired military personnel in need of financing to purchase a home. As such, you may be wondering if there is any leeway around the credit requirement when it comes to VA loans. Here’s what you need to know.
What is considered bad credit?
Before going any further, it’s important to establish what bad or poor credit means. What one person may classify as bad credit, another person may classify as fair or even decent.
Establishing a benchmark based on credit score is a great way to understand what is considered bad credit. To that end, the general rule of thumb is that anything lower than 580 is deemed to be poor credit. This means lenders see the applicant as a risky borrower.
On the other end of the spectrum, good credit starts at 670, according to Equifax®, one of the big three credit bureaus.
So, is it possible to apply for a VA loan with bad credit?
There is no simple answer. VA home loans do not typically have a minimum credit score requirement. Prospective borrowers simply need to be considered a "satisfactory credit risk," among other eligibility requirements as outlined by the Veterans Affairs (VA) office.
But then again, it's not the VA office that lends out the money.
Yes, they insure a portion of the loan, but ultimately, it’s the lenders who stand to lose the most in the event of default. As such, they want to insulate themselves from risk as much as possible. That’s why many VA-approved lenders include a credit score requirement into the borrower eligibility terms.
Additionally, lenders may closely scrutinize the borrower’s payment history over the last 12 months, especially with regard to their rent or mortgage payments.
So to answer the question — it is indeed possible to get a VA loan with bad credit, but the actual loan approval will depend on the lender.
Does a bad credit score affect your VA loan interest rate?
Yes, it does. Applying for a VA loan with a low credit score can mean that you will have to contend with higher interest rates. On the flip side, having a high credit score can earn you a lower interest rate.
What can you do to improve your chances of getting a VA loan with bad credit?
If you’re worried about bad credit affecting your ability to qualify for a VA loan, there are steps you can take to improve your chances of getting approved. The important thing is to do these at least 12 months before talking to a lender.
Work on building your credit — make regular payments on current debts, don't max out your credit limits, look for mistakes in your credit report, etc.
Sign up for a credit monitoring service so you know exactly where you stand by the time you’re ready to file your loan application.
Lower your debt-to-income (DTI) ratio — The DTI ratio is a measure of how much of your gross income is being spent on debt repayments.
Save up for a sizable down payment — VA loans have a 0% down payment requirement, but paying a considerable down payment can help lenders view your loan application more favorably.
Avoid applying for new credit.
Get in touch
At Atlas Crown Mortgage, we pride ourselves on providing top-quality brokerage services for prospective homeowners. If you’re looking to secure a VA loan with bad credit in Arizona, we can help connect you with lenders who may be willing to look at your application.