Home Loans for Veterans With Bad Credit

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Contributor, Benzinga
July 4, 2023

Navigating today’s home-buying market can be tough for anyone — especially if you have less than stellar credit. Fortunately, for those who have served, there are several options for home loans for veterans with bad credit

VA loans are generally the best home loans for veterans with poor credit and can help you find an affordable home without saving tens of thousands of dollars in a down payment or perfect credit. If you haven’t yet explored the VA loan program, your dream of owning a home might be closer to reality than you think.

How Do Veterans With Bad Credit Obtain Home Financing?

Veterans can obtain financing for a home using VA loans, even when they have bad credit. These loans were developed by the U.S. Department of Veterans Affairs with veterans in mind and with the understanding that returning to civilian life can cause financial hardship for some veterans. The criteria to obtain a VA loan is more lenient than other loan types, which can make it ideal for veterans with bad credit. 

The following are some of the biggest benefits that come with using a VA loan to buy your home include: 

Lower Minimum Credit Score

The VA officially has no credit score requirement to obtain a loan. This is because the VA itself does not loan money — instead, it guarantees that in the event a home goes into foreclosure it will pay the debt owed. While this is a great thing if you have bad credit, it doesn’t mean you can get a VA loan no matter what. 

While the VA loan doesn’t have a credit score requirement, the financial institution lending you the money will. The good news if you have poor credit is that you can shop for a bank offering VA loans to applicants with lower scores. While most banks will require you to have a credit score of at least 620 to qualify, you may be able to find lenders with minimums as low as 550. If you have poor credit, you can work with lenders to pay off debts, and some will make exceptions to allow you to secure the loan. 

Shorter Waiting Period After Bankruptcy or Foreclosure

VA loans are more forgiving than any other loan type when it comes to buyers who have experienced a bankruptcy or foreclosure. Even if you were to default on a VA loan and have your home foreclosed on, the waiting period to be eligible for another VA loan is just two years. For reference, the foreclosure waiting period for a conventional loan is seven years, making the VA loan a fantastic option if you have a foreclosure on your record.

Bankruptcies also have a shorter waiting period for VA loans at two years, compared for up to four on conventional loans. If you had a bankruptcy between one and two years ago, you still could be eligible if you can prove that the financial hardship you experienced that forced you to declare bankruptcy was outside of your control. 

The shorter waiting period is very advantageous for veterans, but just because you can retain eligibility faster does not automatically mean you will qualify. You will still have to pass the lender’s requirements for the loan, which means that your bankruptcy or foreclosure may disqualify you depending on the lender’s individual rules. 

Unique Income Qualifications

VA loans have lower foreclosure rates than conventional loans, and a big reason for this is the VA’s requirement for applicants to qualify not only using a traditional debt-to-income ratio but also to meet a residual income requirement.

In basic terms, residual income is the amount of money left over after you have paid your mortgage and all your standard monthly expenses such as utility bills, credit cards and student loans. VA loans require applicants to have enough money left over after their mortgage and these other obligations are paid, which limits the chance of foreclosure.

The VA instructs lenders to more heavily weight the residual income amount compared to the debt-to-income ratio. This means that if you’re able to pay down some debt and you have leftover income in your budget, you may be able to secure a VA loan with bad credit. 

No Down Payment

Another beneficial feature of VA loans is the fact that you don’t need to put any money down to secure the loan. Compare this to the 20% down payment needed for some conventional loans and even the 3.5% needed for Federal Housing Authority (FHA) loans, and it’s easy to see how not needing a down payment is a huge win for those seeking VA loans. 

While you may see the value in this, you may be asking yourself how this feature can help if you have poor credit. Pretend you are looking to purchase a $300,000 home. If you were using a conventional loan, your down payment could be as high as $60,000 (20%). Because there is no down payment needed on a VA loan, you can take that money and pay off existing debts. This will not only help your residual income amount but also can improve your credit score as a whole and give you a better chance of approval from your lender.

No Primary Mortgage Insurance (PMI)

If you buy a home with a conventional loan, you’ll need to pay for private mortgage insurance (PMI) if you have less than 20% to put down on the loan. PMI is insurance that protects your lender in the event that you default on your loan. Despite the fact that you gain no benefits from PMI as the buyer, you are required to pay for this coverage as a condition of your loan when you can’t bring a sufficient down payment. 

Because VA loans require no down payment at all, they also require no PMI. Instead, you’ll pay a one-time VA funding fee when you close on your loan. This can save you thousands of dollars by the time you finish paying off your loan. 

The Types of VA Loans You Can Get With Bad Credit

You might be a first-time homebuyer or someone who is looking to move into a larger home for a growing family. Either way, you can obtain a VA loan even with bad credit. One of the most unique benefits of the VA loan is that it can be used repeatedly, and it does not have to be used just to purchase your first home.

Here are a few different ways you can use the VA loan program to buy a home, even when you have bad credit: 

  • VA purchase loan: VA loans can be used when purchasing a primary residence. If you maintain your qualification and don’t default on your loan, you can use a VA loan to buy a house multiple times. 
  • Cash-out refinance: A cash-out refinance occurs when a homeowner refinances to a home loan with a higher value in order to access a portion of the equity they’ve built in cash. If you used a VA loan to buy your home, you can also take a specialized cash-out VA refinance to tap into your equity. 
  • Rate refinancing: VA loans can also be refinanced if the homeowner wants to take advantage of a better rate. It’s possible to go from one VA loan to another just to take advantage of a better rate and lower your monthly payment.

Guidelines for Closing Costs on VA Loans

Like other types of mortgage loans, VA loans come with unique closing costs you’ll need to cover before you move into your new property. Some common closing costs unique to VA loans can include the following.

  • VA funding fee: This is a variable fee paid directly to the VA that allows the VA loan program to continue. Any VA loan requires the funding fee to be paid, but there are certain exemptions, and it’s possible you could be refunded this fee if eligible.
  • Mortgage origination fee: Lenders are only able to charge 1% of the loan amount as a maximum when issuing a VA loan.
  • VA appraisal fee: The VA appraisal fee covers costs associated with ensuring that the home you’re buying meets VA criteria. Expect to pay between $425 and $875 for this fee per VA loan.

Compare Lenders

Benzinga offers insights and reviews on the following lenders offering VA loans. Consider continuing your search for the right home loan with a few of the links below. 

Frequently Asked Questions

Q

What is the lowest credit score for a VA home loan?

A

While there is no minimum credit score to get a VA loan, the lowest credit score for a VA home loan is 620 with most lenders. 

Q

Can a veteran be denied a VA home loan?

A

Yes, a veteran can be denied a VA loan if they do not meet the criteria of the lender they’re applying with. 

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About Sarah Horvath

Sarah is an expert in the insurance, investing for retirement and cryptocurrency space.