VA Loan With Bad Credit Mortgage Guidelines
This VA home loan guide will cover qualifying for a VA loan with bad credit. VA loans are the best mortgage loan program for owner-occupant homes. One of the greatest benefits a Veteran of the United States Armed Services can get by serving our country is to be eligible for a VA loan. The VA loan program was launched in 1944 to reward Veterans for their service.
VA loans are the best mortgage loan program in the United States. However, not everyone can qualify for VA loans. Only eligible veterans with a valid certificate of eligibility can qualify for VA loans.
Many veterans returning from the Second World War benefited from the newly created VA loans. It made homeownership affordable and very easy. Veterans could qualify for VA loan with bad credit or less-than-perfect credit. This article will discuss qualifying for a VA loan with bad credit and lower credit scores.
VA Loan With Bad Credit Mortgage Guidelines
One of the factors that went into creating the VA Loan Program was to streamline the complexities for veterans applying for a VA loan with bad credit and being able to qualify for a VA loan with bad credit or less-than-perfect credit. Reduce the hassles of getting a mortgage loan, making the home-buying process affordable by requiring no down payment and allowing seller concessions of up to 4% for veteran home buyers.
This is so home buyers do not incur out-of-pocket closing costs. If home sellers do not give sellers concessions, the lender can offer lender credit instead of a higher mortgage rate. VA Funding Fee can be rolled into the VA loan balance. Therefore, there is no money out of pocket from the borrower.
No Money Out of Pocket on Home Purchase
A Veteran with a VA loan can purchase a home with their VA loan with zero down payment, zero closing costs, and no money out of pocket. The government pointed out that Veterans can qualify for VA loan with bad credit. This is because most military personnel who served our country overseas lacked credit—especially established good credit.
VA loans have no minimum credit score requirements. There is no maximum debt-to-income ratio cap on VA loans.
The waiting period after bankruptcy, foreclosure, a deed in lieu of foreclosure, and a short sale is two years, a shorter waiting period requirement than other loan programs. Veterans, in general, have lower credit profiles and lower credit scores than their civilian counterparts. The Veterans Administration made VA mortgage guidelines very lenient.
Down Payment Requirements on VA Loans
Many Veterans did not have any money saved for a down payment on a home purchase. To honor our men and women in uniform, the United States government created the VA loan program to reward and thank our Veterans after completing their service by helping them become homeowners with a VA loan with bad credit.
Homebuyers can qualify for a VA loan with bad credit. You do not have to pay outstanding collections or charge-off accounts.
The key to getting an approve/eligible per automated underwriting system is to have been timely on all of your monthly debt payments for the past 12 months. There is no down payment requirement on VA loans. Lenders will offer 100% financing on VA loans. The Veterans Administration allows sellers to contribute up to a 4% seller concession to the homebuyer’s closing costs. If the borrower is short, the lender can contribute lender credit for closing costs instead of a higher rate.
How Do VA Loans Work?
Over 30% of our VA loan borrowers at Gustan Cho Associates have credit scores under 580 FICO. Then why does one lender have a certain credit score requirement while another does not? Not all mortgage lenders have the same lending requirements for VA loans. In the following sections of this guide, we will discuss qualifying for a VA loan with 500 credit scores.
- No money down
- 100% Financing
- Up to 4% of seller concessions
- VA loan limits depend on the county in the property is located
- However, the Veterans Affairs no longer has a maximum loan limit on VA loans
- The United States Department of Veteran Affairs, or VA, is not a mortgage lender and does not originate, fund, or service VA loans.
- The Department of Veteran Affairs guarantees VA loans to lenders
Guarantees all VA loans will be paid and insured if the homeowner defaults on his or her loan and goes into foreclosure. VA loans are limited to Veterans with an honorable discharge with an active Certificate of Eligibility or COE. Here are the basics of VA loans:
How Do You Qualify For VA Loan With Bad Credit?
Borrowers with a Certificate of Eligibility can qualify for a VA loan with bad credit. VA lenders have generally wanted timely payments in the past 12 months. You can have bad credit, but you need to have re-established yourself. Veterans can qualify for a VA loan with bad credit, but VA lenders want timely payments in the past 12 months.
VA loans have very lenient mortgage agency guidelines by the Veterans Administration. There are no minimum credit score requirements on VA loans.
There are no maximum debt-to-income ratio caps on VA loans. However, you need timely payments in the past 12 months on all of your monthly debt payments to qualify for VA loans. Periods of bad credit are fine, but lenders want to see re-established credit. VA lenders want stable income and good signs of anticipated income for the next three years. Lenders want to see the veterans able to pay their new VA loans promptly. Also, borrowers can pay all their other monthly income comfortably.
What Are VA Residual Income Guidelines?
Lenders want to see enough disposable income by borrowers to meet the VA requirements and standards for the cost of living. Stable income under the eyes of the VA is considered two years of the same employment and continuation of employment for the next three years. Gustan Cho Associates has no credit score requirements on VA loans. Gustan Cho Associates has no debt-to-income ratio requirements on VA loans.
Many lenders require a higher credit score on VA loans. VA does not have a minimum credit score. It is the VA lender that requires and sets the credit scores. This is called a lender overlay.
Borrowers can qualify for VA loans with a 60% debt-to-income ratio. Sometimes, you can get an approve/eligible with a higher debt-to-income ratio than 60% with a strong residual income. Contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Or email us at gcho@gustancho.com if you have a high debt-to-income ratio and need to qualify for a VA loan with a lender licensed in 48 states, including Washington, DC, Puerto Rico, and the U.S. Virgin Islands, with no overlays.
VA Loan With Bad Credit After Bankruptcy or Housing Event
Borrowers can qualify for a VA loan two years after a Chapter 7 Bankruptcy discharge date. No late payments after the Bankruptcy discharge date. Borrowers can qualify for a VA loan one year into a Chapter 13 Bankruptcy repayment plan.
Borrowers can also qualify for a VA loan right after a Chapter 13 Bankruptcy discharge date with no waiting period. Collection and charge-off accounts do not have to be paid to qualify for a VA loan.
There is a two-year waiting period to qualify for a VA loan after a recorded foreclosure date or deed-in-lieu of foreclosure. There is a two-year waiting period to qualify for a VA loan after the short sale date, which is reflected in the settlement statement of the short sale. Deferred student loans for over 12 months are exempt from debt-to-income ratio calculations.
Tips for Obtaining a VA Loan with Bad Credit:
Obtaining a VA loan with poor credit may pose difficulties, it is certainly not an insurmountable task. With careful planning and strategic steps, individuals with less-than-perfect credit can improve their chances of loan approval and favorable terms. Here are some tips to consider:
Check and Improve Your Credit Score: Start by getting a copy of your credit report from (Equifax, Experian, and TransUnion), meticulously scrutinizing them for any inaccuracies or inconsistencies. Address any errors by disputing them, and take proactive steps to enhance your credit score by consistently paying bills on schedule, minimizing debt, and refraining from initiating new credit inquiries.
Build a Strong Financial Profile: In addition to improving your credit score, focus on strengthening other aspects of your financial profile. This includes paying down existing debt, minimizing new debt, and increasing your savings and reserves. A strong financial profile can help mitigate concerns about your credit history.
Shop Around for VA-approved Lenders: Not all VA-approved lenders have the same credit requirements or offer the same terms. Consider exploring different options and comparing offers from several lenders to identify the one that aligns best with your requirements. Consider working with lenders experienced in handling VA loans for borrowers with bad credit.
Consider a Co-Borrower or Co-Signer: If your credit is insufficient to qualify for a VA loan, consider applying with a co-borrower (such as a spouse or family member) or enlisting a co-signer with stronger credit. Keep in mind that both parties will share equal responsibility for repaying the loan.
Focus on Compensating Factors: Highlight any compensating factors that may strengthen your loan application, such as a stable employment history, steady income, or significant cash reserves. Providing evidence of responsible financial behavior can help offset concerns about your creditworthiness.
Be Prepared to Explain Your Situation: During the loan application process, be prepared to provide explanations for any past credit issues or financial challenges. Demonstrating accountability and a proactive approach to addressing past issues can reassure lenders of your commitment to responsible homeownership.
Prequalify in just 5 minutes for VA Loan with Bad Credit!
Frequently Asked Questions (FAQs)
- Q: How can I increase my chances of securing a VA loan with poor credit?
A: You can enhance your chances by improving your credit score, reducing debt, maintaining stable employment, and demonstrating responsible financial behavior. - Q: Are there any alternatives for individuals with bad credit?
A: If you cannot qualify for a VA loan due to bad credit, you may explore alternative options such as FHA loans, USDA loans, or conventional loans w/ private mortgage insurance (PMI). Each option has its eligibility criteria and requirements. - Q: Will bad credit affect my interest rates?
A: Individuals with bad credit may face higher interest rates than those with good credit. Lenders often use credit scores to determine interest rates, so borrowers with lower scores may be offered less favorable terms. - Q: Can I use a co-borrower or co-signer to meet the VA loan requirements despite having poor credit?
A: Yes, utilizing a co-borrower (such as a spouse or family member) with better credit or a co-signer willing to take on responsibility for the loan, chances of approval can improve. However, it’s important to remember that both parties are equally responsible for repayment. - Q: What documents do I need to apply for a VA loan with bad credit?
A: Typical documentation includes proof of income, employment history, bank statements, tax returns, and identification. Lenders may also request additional information based on individual circumstances. - Q: What’s the typical timeframe for approval on a VA loan with less-than-ideal credit?
A: The time it takes for approval can fluctuate based on variables like the lender’s workload, application complexity, and any extra documentation needed. Typically, the approval process may span several weeks on average. - Q: Can I refinance a VA loan with bad credit?
A: Indeed, it’s feasible to refinance a VA loan with subpar credit, although obtaining favorable terms may pose more difficulty. Refinancing holds the potential to reduce your interest rate or monthly payments, but it’s crucial to thoroughly assess the associated costs and advantages. - Q: Will applying for a VA loan with bad credit affect my credit score?
A: Yes, applying for a VA loan with bad credit may temporarily decrease your credit score because of the credit inquiry and the new account opening. However, responsible financial management and timely payments can help mitigate any negative impact over time.
Borrowers who need to qualify for a VA loan with bad credit and low credit scores can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. You can also email us at alex@gustancho.com. We have no lender overlays on VA loans. The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays.
