You are planning to buy a house but you have a bad credit score. Don’t worry, you might still have a chance to get approved if you apply for a VA-backed home loan! If you are a veteran or in active service, you could be eligible for the housing assistance offered by the U.S. Department of Veteran Affairs (VA).
The VA offers home loan programs to help veterans, service members, as well as surviving spouses, purchase a home. There are different types of VA home loans but the most common one is the VA-backed home loan.
What Is A VA-Backed Home Loan?
A VA-backed home loan can be used not only to buy a home but also to build, improve, or keep your current home. Getting a VA-backed home loan is advantageous if you qualify because it allows you to purchase a house with no down payment. According to the VA, nearly 90% of VA-backed home loans were made without a down payment.
A VA home loan can also offer you better terms and interest rates, not require you to pay mortgage insurance premiums (MIP) or private mortgage insurance (PMI), no penalty fees if you pay the loan early, and fewer closing costs.
Because of these reasons, a VA-backed home loan is a much better and cheaper choice for veterans compared to other government-backed home loans including FHA loans. An FHA loan, for instance, will require you to pay two mortgage insurance premiums while a VA home loan saves you thousands of dollars as these MIP payments are not necessary. nec ullamcorper mattis, pulvinar dapibus leo.
But Can You Get A VA-Backed Home Loan Even If You Have Bad Credit?
The answer is YES. One of the best things about VA-backed home purchase loans is that there is no minimum credit score set by the VA. This means that even if you have a poor credit history, that does not immediately disqualify you from applying for a VA home loan. For example, if you are looking for home loans for disabled veterans with bad credit, you could still be eligible for a VA-backed home loan. However, just because you are eligible does not mean that you will get immediately approved for a VA home loan.
Unless you are applying for a VA direct home loan, which at the moment only offers the Native American Direct Loan (NADL) program for Native Americans, the Department of Veteran Affairs will not serve as your mortgage lender. With a VA-backed home loan, the VA is only guaranteeing a portion of the loan that you will get from a private lender. In short, the VA is not lending you the money. The VA is only helping you become a better risk for mortgage lenders.
How does this affect your chances of getting a VA home loan?
Even if the VA does not set a minimum credit score, many private lenders have additional requirements also known as “overlays” before they give you approval. These requirements are on top of what the VA requires. One example of an added requirement is your credit score. Some lenders will not consider you if your credit score falls below 620. This can be very frustrating, especially if you already have your hopes up that you are eligible to buy a house even with a poor credit history
Step-by-step Guide On How To Get A VA-backed Home Loan Even With A Bad Credit Score
So, how can you get a VA home loan if you have a low credit score? Is there a way to increase your chances to get approved for a home loan under this program? While every lender in every state is different and they have different sets of requirements, you can follow some of the tips below to help you get a VA home loan even with a bad credit history.
Step 1: Apply For Your VA Home Loan Certificate Of Eligibility (COE)
The first step to get a VA home loan is to first make sure that you qualify for this type of mortgage. The lender will need proof that you are indeed eligible to get a VA-backed home loan so you would need to show your Certificate of Eligibility or COE issued by the VA.
Depending on your status (veteran, active service member, National Guard, spouse, etc.), there will be a different set of requirements that you will need for the COE application. For veterans, some of the basic VA home loan requirements to get a COE include the following:
- A copy of your discharge or separation papers (DD214)
- You must meet the minimum active duty service requirement based on when you served
- You must not have received a dishonorable discharge.
You can then apply for a COE using any of the following methods:
- Apply for a COE by going to the eBenefits website and register/log-in for an account. This method is recommended for faster processing.
- Apply for a COE through your lender by asking them to submit the request for you using the VA Web LGY system. Note that this will only be possible if you already have a lender in mind.
- Apply for a COE via mail by filling out a Request for a Certificate of Eligibility. Download VA Form 26-1880 and mail it to the address listed on the form. This method takes more time than the other two electronic methods listed above.
For the complete requirements, you can go to the VA web page on how to apply for a COE.
Step 2: Request For A Copy Of Your Credit Report
Many homebuyers make the mistake of not checking their credit report themselves and letting the mortgage lender do the checking by running a hard inquiry on their credit reports. This hard inquiry can lower your credit score so if your credit history is already low, this hard inquiry can further lower it which could also lower your chances.
Even before talking to any mortgage lender, request for a copy of your own credit report from the three major credit bureaus – TransUnion, Experian, and Equifax. This is very important so you can check the status of your most recent credit report to see where you stand. If your score is less than 600, then you know that your chances are slimmer and you can make ways to improve your credit score.
To request a free copy of your credit report, visit www.AnnualCreditReport.com.
Step 3: Take Steps To Improve Your Credit Score And Credit History
As mentioned earlier, even if the VA does not require a minimum credits score, most private lenders require a credit score of above 620 even for VA-backed home loans.
Aside from your credit score, other common VA home loan requirements to get approved include the following:
- A maximum debt-to-income ratio of 43% to 50%
- You should not have late payments in the past 12 months
- You must be able to show 2 years of provable income (tax returns and W2s)
- You must be able to show 2 to 3 months of bank statements
- You must be able to show 2 months of mortgage payment in reserve
Depending on the lender, where you live, and the house that you are planning to buy, these requirements will vary. It is then logical for you to not rush the process and take steps to improve your credit report for a few months before you go mortgage shopping. Keep in mind that the higher your credit score, your chances of getting approved and being offered better deals are also higher.
Some steps that you could take to improve your credit score include the following:
- Check your credit report carefully for any errors. According to a study by the Federal Trade Commission, one in five people has errors in at least one of their credit reports. If you find any error that is pulling down your score, you can file a dispute to remove negative entries from your credit report. Check out our separate post on how to remove negative entries from your credit report yourself.
- Make timely payments. Even if your credit score is lower, showing that you have not missed any payments in the last couple of years can be a plus point.
- Don’t make any big purchase like buying a car, get a title loan, or maxing out your credit cards. The lower your debt-to-income ratio is, the better.
- If you don’t have a credit card or an existing loan, you can build your credit score by getting a secured credit card and by making timely monthly payments.
Step 4: Shop For A Mortgage Lender And Get Pre-Qualified
Finding the best VA home loan lenders for people with bad credit is not a one-step process. It is not recommended to just stick with the first lender you find that is willing to lend you money. You have to get multiple quotes from different lenders to see what the best deal is out there.
Take note, however, that looking for a lender could lower your credit score if the lender performs a hard credit check on your credit report. To avoid this, you can do mortgage shopping without hurting your credit score by researching lenders first and then by getting pre-qualified.
You can search online and shortlist the lenders that are offering VA-backed home loans to people with bad credit. Ask about their requirements and see whether they offer pre-qualification without requiring a hard credit check. During a mortgage pre-qualification, a lender will pre-qualify you by either using the info you provide or by running a soft credit check without hurting your credit score.
During mortgage pre-qualification, you will also get an idea of whether you still need to improve your credit score or whether you can manage the payments with the terms being offered to you. You will also get an idea of how much money you are qualified to borrow to purchase your house.
Step 5: Get Mortgage Pre-Approval
After mortgage pre-qualification, the next step is to get mortgage pre-approval. You should only do this step when you have already decided that you’ll buy a house, not when you’re just trying to look around. The reason is that during mortgage pre-approval, the lender would have to perform a hard inquiry on your credit report. You wouldn’t want to lower your score with a hard inquiry if you’re just looking around and not decided yet.
From the lenders that have pre-qualified you for a VA home loan, choose the best three lenders to get mortgage pre-approval. Try to complete this process within 14 days so the hard inquiries will only count as one inquiry. You would have to submit requirements so make sure that all your requirements are ready before moving on to the pre-approval process.
Choose the lender that will offer you the best deal. Take note that lenders often charge veterans using a VA-backed home loan a 1% flat fee and may charge other additional fees. Take these fees into account when choosing your lender.
Once you are pre-approved, you can then proceed to find your dream home through a realtor. You have to disclose to your realtor that you are using a VA-backed home loan. There may be additional steps involved in the home buying process such as getting the home appraised by a VA-approved appraiser before your loan gets approved.