When it comes to finding options for home loans for folks with bad credit VA loans rarely make the list. Most people don't think about VA loans as being for people with bad credit, however, as you will see in this article, VA loans for those with bad credit are actually easy to qualify for as long as you meet their criteria. The current state of your finances will also play a huge role in whether or not you can get a VA loan. Before we dig into this, however, understand that the VA not only offers multiple programs but they also offer ‘work arounds’ if you don’t quite meet the criteria in certain areas. I’ve never heard of a bank offering any kind help like that.
Let’s get started here.
First things first, you must have no current outstanding collections and no outstanding judgments against you. You must also be able to show a stable income and a median credit score of 620 or higher.
The VA loan program was created in 1944 as a thank you for service personnel returning from World War II. The goal was to make it possible for servicemen who likely would not have had any other chance, to purchase a home and become a homeowner.
Making this loan accessible to borrowers with less than perfect credit is considered the easy part. And it is true that the VA loan program has helped untold thousands of people get into homes and become property owners who would never have had a chance otherwise. For those who qualify, this program is a real godsend.
Cutting out the common hassles of obtaining a home loan such as good credit, down-payment, closing costs, etc.is what this loan is all about.
For multiple reasons, many veterans lack positive credit or the funds for a down-payment. The government decided one of the best ways to assist veterans after their completed service was to help them get home or some land.
VA loans with bad credit
Over the years two major things have changed which includes an increase in the amount veterans may borrow and the ability for active duty to apply to get a VA home loan.
Currently, homes below $484,350 and in some areas $726,525 and depending on what county you plan to buy in, can be purchased with $0 down. Think about that for a minute because it is a HUGE benefit to you if you are trying to purchase a home.
Because of the VA Loan Program lenders have the assurance that the loan will be paid for, veterans have the support needed to obtain a house and some land. This is one of the very few government programs that have had long-term success in accomplishing its goal. Untold thousands of people have been able to become homeowners thanks to the VA loan program.
There are only a few important elements that when obtained can and will ensure approval for your VA loan. As stated a satisfactory payment history is arguably the most important, followed quickly by present and/or future anticipated income. To be a success at this you need an income that is stable over time and bills current plus; you must be able to easily afford the loan payments given your current financial situation. To really impress the powers that be at the VA loan office, you must be able to show enough disposable income to meet the VA standards for cost of living as well as the VA loan mortgage payment.
Stable income is normally considered 24 months of steady solid income. If there are potential future income opportunities, the underwriter will have to evaluate that and offer his/her expert opinion. They like to see a FICO Credit Score of a least 620 even though there are officially no actual rules about this.
Here’s an article from the Veterans Loan Center to help you: https://www.vamortgagecenter.com/va-loans-bad-credit.html
But don't worry; the VA has loans for people with no credit or even scores below 620. If you fall in the no credit area, then your potential qualification is determined based on past rent payment history, car insurance, and other monthly expenses.
Even one or two late payments in the last year or any unpaid or untimely debts can easily get you denied, however. But this is an area that the VA offers a ‘work around’. Let me explain.
Just because you have late payments, though, this may not result in an automatic denial. There is an exemption for this rule under special circumstances. You would still be eligible even with open collection accounts just as long as you have committed to a payment plan and put it in place. It might be a good idea to meet with a Consumer Credit Counseling program or possibly file Chapter 13 bankruptcy as those can show as a positive step for a VA loan.
For a normal bankruptcy called a Chapter 7, at least two years must have passed since the bankruptcy was discharged or forgiven for the VA to consider you as having satisfactory credit.
As far as the VA is concerned, as long as you are making your payments, a Chapter 13 does not have to be discharged for you to qualify.
Another special circumstance would be if you were forced to file bankruptcy because of medical circumstance or any number of other issues out of your control. These types of situations will not be held against you.
Another special circumstance involves if you were forced to file bankruptcy because of a failed business venture and at present you have employment, you will still be considered for a VA loan. You must also have no derogatory credit information since the bankruptcy or prior to the self-employment to qualify for this special exemption.
Your VA loan approval will be delayed in most cases by too many inquiries on your credit report but in most cases, that alone won’t disqualify you completely. In case you were not aware, non-mortgage inquiries can cause a huge drop in your credit rating. Truth is multiple non-mortgage credit inquiries can look like new credit lines and couple with a low credit score this can look like it will affect your ability to repay the debt.
Let's take a look at a few important questions and answers about VA loans
What are the VA loan eligibility requirements?
Most members of the regular military, veterans, reservists and National Guard are eligible to apply for a VA loan. Spouses of military members who died while on active duty or as a result of a service-connected disability also can apply.
Active-duty military personnel generally qualify after about six months of service. Reservists and members of the National Guard must wait six years to apply, but if they are called to active duty before that, they gain eligibility after 181 days of service.
You may qualify if you:
● Served 90 consecutive days of active service during wartime
● Served 181 days of active service during peacetime
● Have been an active member of the National Guard or Reserves for 6 years or more
● Are married to a service member who died in the line of duty or as a result of a service-related disability
Do VA loans require PMI?
Unlike other low down-payment mortgage options, a VA loan doesn’t require PMI. Federal Housing Administration (FHA) loans and conventional loans with less than 20 percent down require PMI, which can end up costing the borrower thousands over the life of the loan.
The benefit translates into significant monthly savings for VA borrowers. For instance, a borrower who makes a 3.5 percent down payment on a $200,000 purchase with an FHA-insured mortgage would pay $139.19 a month for mortgage insurance alone.
What are VA loan funding fees?
Although the costs of getting a VA loan are generally lower than other types of low-down-payment mortgages, they still carry a one-time funding fee that varies, depending on the amount of the down payment and military category. This fee helps offset taxpayers’ costs since there’s no PMI or down payment required.
Any old or current savings or checking account overdraft fees need to be paid up and cleaned up as this will look bad and the VA frowns on any unpaid debts.
Here are your top 5 keys to getting a VA loan
These loans are easier to obtain than conventional mortgages because they are backed by the VA and are ideal for many veterans who may not qualify for other loans. Take a look at these five key elements to help you succeed in getting a VA backed loan.
1. The loans are NOT Issued by Veterans Affairs
No matter what the situation you are still dealing with standard banks and lenders. What the VA does is guarantee they will pay a large portion of the loan should you default on it. What this does is offers the bank or lender some security that the loan will be repaid should you default for any reason.
A mortgage lender who specializes in obtaining VA loans is going to be where you need to start. You will need to show the lender your Certificate of Eligibility (COE). This document confirms that you are eligible for a VA-backed loan so the lender can proceed.
It's very simple to apply for a COE through your eBenefits account. You can also apply by mail by completing Form 26-1880 and sending it to the Atlanta Regional Loan Center if you would rather do it by mail and avoid the internet. If your lender has access to WebL GY system you may be able to apply for a COE that way as well.
2. Bottom Credit Score Not Required
Using a VA backed loan over conventional loans has 2 major benefits. To the lender you are a much lower risk because the VA has backed your loan so, if your house costs less than $484,350 there is no down payment required. This can save you thousands of dollars right off the bat.
The second great advantage is that there are no minimum credit score requirements for borrowers to qualify for a VA loan. An applicant with a score below 620 in most cases would not qualify for a home mortgage loan. A VA-backed loan may be the only option someone in that position has.
So where is the catch in this deal?
So you must be asking, where's the catch? Here it is; there is a downside and it's called the VA’s Funding Fee. This fee, which is typically between 2% and 3.5% of the loan, rather than being due upfront, it’s normally just added to the loan. To help keep the VA home loan program going, the VA’s Funding Fee goes back into the program.
3. Refinancing With a VA Loan
VA-backed home loans can be used to refinance a current loan into a new VA home loan. There are two main types of refinancing options the VA supports. You’ll have to decide which is best for you.
If you currently have a VA loan and want to lower your monthly payment or reduce the length of your loan then you can apply for an Interest Rate Reduction Refinance Loan (IRRRL). This is also called a VA Streamline Refinance loan. Refinancing requires no appraisal or credit underwriting package and it can often be completed with no out-of-pocket expenses.
The Cash-Out Refinance Loan is the other type of VA refinance loan, and it can be used to obtain cash for home improvements, paying off debt, or other financial needs. You simply refinance up to 100% of the home’s value as mortgage debt, with the equity available as cash.
You can turn a conventional mortgage loan, USDA loan, or FHA loan into a VA home loan using the Cash-Out refinance loan option.
4. How and when you served may play a Part in your Qualifying
If you don’t qualify due to poor credit or the lack of a down payment, a VA loan is great. But they are not available to everyone but are a special benefit solely for eligible service members, veterans, and their families.
There are also specific eligibility requirements, particularly regarding their terms of service. Whether you served during wartime or peacetime, and whether you are a Selected Reserve or National Guard member.
During wartime need to have served at least 90 days of active duty without a dishonorable discharge, or less than 90 days with a discharge for a service-connected disability. During peacetime, it’s at least 181 days of continuous active duty and no dishonorable discharge, unless discharged for a service-connected disability.
5. You May Qualify for Other Bad Credit Home Loans
The VA-backed loans are definitely a great choice for folks who qualify but don’t forget you may have other options when looking for a mortgage loan with bad credit — your chances of success increase if you have a decent-sized down payment. An FHA loan is possible if you have a credit score of 580 or above. Also if you have a score above 620 you may even be able to get a conventional mortgage.
VA backed loans are a real Godsend to many veterans who otherwise would not qualify for a mortgage loan. And the truth is because these loans are solid in the eyes of the bank; VA loans can be quite flexible as we have shown in many of the cases above.
FACTS ABOUT VA LOANS
The loan doesn’t come from the Department of Veterans Affairs. The VA only guarantees the loan; it does not issue the loan. What this means is that the VA provides assurance to the lender that a portion of that loan will be covered should the borrower default on the mortgage. In other words, the lender is covered up to the amount of the guarantee. This makes a VA loan a NO LOSE loan for the bank.
Only certain properties are eligible. Co-ops aren’t eligible for VA loan benefits. On its own, vacant land isn’t eligible for a VA loan, either. However, it may be eligible if it’s used simultaneously with a construction loan. And other properties, like modular or manufactured homes, are subject to the lender’s approval.
They must be used on primary residences. You can’t use your VA loan benefits to buy a vacation home or an investment property. There are residency requirements set by the VA that make these properties ineligible.
There are no pre-payment penalties. You can make extra payments over the life of your loan and pay off your loan sooner without getting penalized. These extra payments, made at any time you want, can save thousands of dollars in interest over the life of your loan.
They have a funding fee. This fee is the cost associated with obtaining a VA loan and helps to ensure that the loan continues to require no down payment and no monthly mortgage insurance. Which leads to…
There’s no monthly mortgage insurance. With other loan programs, if you don’t have at least 20 percent down on a new mortgage, you’re required to pay a monthly or upfront mortgage insurance fee. This requirement is eliminated by the VA’s Funding Fee.
You can reuse the VA loan benefit. As long as you pay off your existing loan, you’re allowed to use your VA loan benefit as often as you’d like. If you’re moving you may even have enough entitlement to get another VA loan without selling your current one.
The real keys are simply to keep payments current, be sure and show the VA that if you have defaulted on payments that there were special circumstances (if there were) and ask for the exemption offered under these special circumstances. If you don’t show them and ask for it, it could mean you being denied when you could have been approved.
The best advice I ever got about VA loans when I started was to take your time and have patience with the process. A VA loan will likely take a little time but in the end, it can be well worth it to get a VA backed loan that you may not have had a chance at with the VA’s help.
AUTHOR BIO
Will Foster | First State Bank Mortgage Senior Loan Officer
I became a mortgage lender in 2010, right after the "bubble" popped, and the mortgage industry underwent an incredible transformation. This has given me a unique advantage in the fact that I have never known anything other than the highly-regulated world we now live in.
Throughout my years of experience, my primary goal has been to keep up with the constant changes in the industry so I can help my clients investigate all of their options and maximize savings. In addition, because I specialize in Conventional, FHA, USDA, Jumbo, portfolio, and VA refinances and purchases, I can help a wider variety of individuals, families, and investors identify and secure the right loan to best suit their future interests.
The mortgage process can be a little confusing and even overwhelming these days with all of the regulations. I guide my clients through the process from start to finish, and I try and make it as painless and hassle-free as possible.