Veterans with disabilities can benefit greatly from a VA loan, and a low credit score doesn't necessarily preclude you from getting one.
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VA loans have many benefits, particularly for those who have a service-connected disability. Veterans with disabilities can receive a mortgage with 0% down and a low interest rate, plus home improvement grants to make their home more accessible. Veterans who are receiving or are eligible to receive VA disability compensation are also exempt from paying the VA funding fee.
VA loan borrowers need to meet minimum service requirements set by the VA, as well as minimum credit requirements set by their lender. If you have a poor credit score, this can make getting a mortgage tricky. But it's not necessarily impossible.
It's possible to get a VA loan even if your credit isn't great, but you might have a harder time finding a lender that's willing to work with you.
The Department of Veterans Affairs doesn't set a minimum credit score for the loans it guarantees, but individual mortgage lenders are allowed to set their own standards, and many require credit scores of at least 620 for VA loans.
But there are also plenty of lenders that accept borrowers with lower scores — sometimes even as low as 500. There are also lenders that will work with borrowers who have recent bankruptcies or foreclosures, and ones who will work with borrowers who have no credit score at all. You'll just need to do some extra research to find the right lender for you.
"VA loans have some of the lowest interest rates of any loan program on the market, even with a low FICO," says Ben Davis, senior loan officer for Northstar Mortgage in the Pacific Northwest. "I've had clients with lots of derogatory credit, that were still able to qualify for a home."
As you prepare to apply for a mortgage, look for lenders that have low minimum credit score requirements or are willing to work with borrowers who have rocky credit histories. Some may be willing to look at non-traditional credit like your rent payment history or consider explanations for a poor score, such as temporarily losing your source of income or having to pay a large medical debt.
Many lenders disclose their minimum credit requirements online. If you're not sure about a lender's requirements, you can typically call and talk to a loan officer or even connect with someone via chat on the lender's website.
A few of our favorite lenders that accept lower scores on their VA loans include Rocket Mortgage, which allows scores down to 580, New American Funding, which also has a 580 minimum, and Carrington Mortgage Services, which will approve borrowers with scores as low as 500 on its VA loans.
Movement Mortgage is another solid choice that requires a 580 score, and Freedom Mortgage will go down to 550.
Veterans United, our top VA lender pick, has a 620 minimum, but it offers no-cost credit counseling to borrowers who don't yet meet its requirements.
If you currently have no credit score, you may be able to use non-traditional credit with certain lenders to prove your creditworthiness. Guild Mortgage, for example, will let you use your rent, utility, or car insurance payment history to establish a credit profile.
As you shop around for the right lender, keep track of which lenders have lower or more flexible credit requirements. When you're ready, apply for preapproval with three or four lenders that you think might be willing to work with you. That way you can compare what each lender offers in terms of rates, fees, customer service, and extra benefits like fast closing times or digital document upload capabilities.
If you're having trouble finding a lender that accepts a low score, you might want to consider working with a mortgage broker, who will do the work of shopping around for you.
"Mortgage brokers, as opposed to mortgage banks, tend to have the largest selection of lenders and will typically be able to sift through those lenders to find those that are the most flexible," Davis says.
If you're able to, improving your credit and other areas of your application can boost your approval odds and even help you snag a better interest rate.
When considering an applicant for a mortgage, lenders look at their credit score, income, debts, and savings. If one part of this financial picture is a little weaker, strengthening the other parts can help you look more creditworthy to the lender.
Paying down debt will help lower your debt-to-income ratio, which is one of the key factors lenders consider when looking at a borrower's financial situation. Your DTI tells the lender how much you can afford to spend on debt and other financial obligations each month relative to your income. If you can afford to pay off or pay down a credit card, for example, that can give you more space in your budget to take on a monthly mortgage payment.
Lowering your credit card balances will also decrease your credit utilization ratio, which can increase your credit score.
Though VA loans don't require a down payment, bringing some of your own cash into the transaction might also increase your approval odds, since you'll be viewed as less of a risk in the eyes of the lender.
If you receive disability compensation from the VA, be sure your lender knows about it. Disability income can be used to qualify for a mortgage. Additionally, because this income isn't taxed, lenders can "gross up" disability income by 25%, meaning it considers your income to be 25% higher than what you actually receive, because you don't pay taxes on it. This can make it easier for you to qualify for a mortgage.
The better your overall credit profile, the more likely you are to be approved, and at a lower rate. But even if you're approved with a relatively high rate, VA loans have a benefit that makes it extremely easy to refinance into a lower rate. This type of refinance is called an interest rate reduction refinance loan (IRRRL).
"The VA offers one of the simplest and fastest streamline refinances on the market," Davis says. "This allows veterans to improve their interest rate with very little paperwork if their credit score improves substantially, or if rates in general get lower."
If you can't find a lender that will qualify you for a VA loan, you may still have other options to get into a home.
FHA loans are geared toward borrowers with shaky credit, and typically require a minimum score of 580. If you can put down at least 10%, you may be able to get an FHA loan with a score as low as 500. But if your score is at least 580, you can put down as little as 3.5%.
If you bank with a local credit union, you may also want to see if it would be willing to work with you. Sometimes credit unions can provide flexibility that regular banks can't.
Getting a mortgage with bad credit can be challenging, but there are many lenders willing to work with those with lower scores. If you're still having trouble qualifying, take some time to work on building a strong credit history by making on-time payments and keeping your utilization low before re-applying.
