| Guideline | Key Takeaway |
|---|---|
| Minimum Credit Score | No official VA minimum, although many lenders will set their own minimum standards |
| VA Flexibility | VA allows manual underwriting for lower scores with compensating factors |
| Recent Payment History | Last 12 months of on-time payments crucial for approval |
| Alternative Credit | Rent, utilities, and insurance payments can be used if traditional credit is limited |
| DTI Ratio | Higher DTI ratios may be accepted with strong compensating factors |
| Compensating Factors | Substantial savings, stable employment, or disability income can offset credit issues |
| Post-Bankruptcy/Foreclosure | Possible to qualify after 2 years or 1 year with extenuating circumstances. This is shorter than other loan types |
| Credit Improvement | Some lenders offer credit counseling to help veterans boost scores |
| Interest Rates | Lower credit scores may result in slightly higher interest rates |
| Lender Variation | Requirements and flexibility vary by lender; shop around for best options |
Take the 30 second mortgage quiz to see if you qualify
Did you know that over 25% of Americans have bad credit?
Sadly, many of these Americans are veterans and are being needlessly being turned away for VA home financing.
If this is you, you’re in luck because I’m going to show how it is possible to get approved for a VA home loan with poor credit.
The VA loan is extremely flexible, and VA guidelines state that they want as many veterans as possible to get approved.
But, there are a few things you need to keep in mind. The VA does not write the loan. They just write the ground rules and the mortgage insurance. The VA is not a lender.
However, you need to be aware of lender overlays. A lender overlay is where a lender creates a rule on top of what the VA says.
There is no minimum credit score to get approved for a VA home loan.
Each lender sets their own minimum standards for approval.
Some lenders are true “no overlay lenders” and have no minimum credit score.
Other lenders set a score minimum. Some might set that at 500. Others might set it at 580 or 620.
That doesn’t mean everybody can get a VA loan. It simply means that there is a lot of flexibility in getting approved.
One of the great benefits of the VA home loan program is the fact that it allows for extenuating circumstances.
Extenuating circumstances are things that are beyond your control that caused the delinquency. If extenuating circumstances exist, the lenders will be a lot more flexible with your mortgage approval.
Some allowable extenuating circumstances are:
VA guidelines state that veterans are typically not to be approved for a VA home loan less than two years after a Chapter 7 bankruptcy discharge. There are a few exceptions at one year but those can be hard to get approved.
Chapter 7 bankruptcy guidelines are addressed in Chapter 4 of the VA Handbook.
“The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself
disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy.
Consider the reasons for the bankruptcy and the type of bankruptcy filing.
Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law
You may disregard a bankruptcy discharged more than 2 years ago.
If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to
determine that the applicant or spouse is a satisfactory credit risk unless both of the following
requirements are met:
• the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and
has satisfactorily made the payments over a continued period, and
• the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as
unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the
circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower
and/or spouse.
If the bankruptcy was caused by failure of the business of a self-employed
applicant, it may be possible to determine that the applicant is a satisfactory credit risk if
– the applicant obtained a permanent position after the business failed,
– there is no derogatory credit information prior to self-employment,
– there is no derogatory credit information subsequent to the bankruptcy, and
– failure of the business was not due to the applicant’s misconduct.
If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not
generally be possible to determine that the borrower or
spouse is a satisfactory credit risk.”
On a Chapter 13 bankruptcy, it is a little bit different because the 13 is based on the bankruptcy filing date. If the veteran has made 12 on time payments on the Chapter 13 payment plan, then it is possible to get approved for a VA home loan.
This is also addressed in Chapter 4 of the VA Handbook and a copy of that guidance is below.
“This type of filing indicates an effort to pay creditors. Regular payments are
made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to
pay off scaled down or entire debts.
If the applicant has finished making all payments satisfactorily, the lender may conclude that the
applicant has reestablished satisfactory credit.
If the applicant has satisfactorily made at least 12 months worth of the payments and the Trustee
or the Bankruptcy Judge approves of the new
credit, the lender may give favorable consideration.”
If you have a foreclosure, you will need to wait at least two years after the deed transfer date to be eligible for VA financing.
This waiting period can be reduced to one year if you have extenuating circumstances.
If the loan that was foreclosed on was a VA loan, you will need to settle that charged off debt with the VA or it will be charged against your available entitlement.
If you are in this situation, please reach out to me because I can help you get the charged off foreclosure settled for pennies on the dollar.
This is addressed in the VA Handbook, Chapter 4 and that guidance is listed below.
“The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or
spouse’s) credit history does not in itself disqualify the loan.
• Develop complete information on the facts and circumstances of the foreclosure.
• Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge
provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”
If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the
new loan. Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to
meet any secondary marketing requirements of the lender.”
There are two different types of underwriting available for VA home loans. There is automated underwriting, and then there is manual underwriting.
Automated underwriting is the preferred method because it’s a simpler process. During automated underwriting, I submit the file to the automated underwriting system or the AUS.
The software gives an “approved eligible” response or a “refer” response. If it is “approved eligible”, then the underwriter simply looks to make sure that the supporting documentation submitted matches what the AUS asked for.
Sometimes the AUS software gives a “refer” response. In those cases, we can use manual underwriting instead. Manual underwriting is where a human underwriter determines if the file meets VA guidelines for approval.
Manual underwriting is really interesting on the VA side because the VA is super flexible with what they allow.
The VA Handbook says “underwriters are encouraged to consider every possible factor in seeking a proper basis for approving loan applications for every qualified veteran, as long as lenders document their reasoning, it is extremely unlikely that VA staff would ever take issue with their decision”.
That being said, lenders don’t want to just randomly say, “Well, this person is approved, this person is not.”
Lenders also set their own manual underwriting guidelines to have a fair and consistent policy for everyone.
The VA sets the manual underwriting guidelines intentionally vague and each lender sets their own overlays on manual underwriting.
For example, even though the VA says that delinquencies that have been added within the past year are allowed on a manual underwrite, I do not know of a single lender that will allow them.
Some lenders will allow for delinquencies in the past year if there are extenuating circumstances but each lender interprets the extenuating circumstance guideline slightly differently.
Additionally, every lender will ask for a letter of explanation detailing why the accounts went delinquent and how that has been resolved.
Even though the VA does not have a minimum credit score for manual underwriting, most lenders will set minimum credit scoring guidelines. I know of a few lenders that do not have a minimum credit score, but that’s rare. Most set the minimum score for VA manual underwriting at 580 or 600.
This is one of the huge advantages that I have as a full service mortgage broker. I can go through the lender guidelines and play the lenders against each other. This helps us determine which mortgage lender can best suit your needs.
One thing that will get examined very closely on a VA manual underwrite is the debt ratio. Lenders want to be assured that you have the ability to repay the loan.
The debt ratio is defined as your debts divided by your income.
For example, if you are making $4000 a month in gross income before taxes, and have $2000 a month in debts, you have a 50% debt ratio.
It can be hard to get a manual underwrite approved with over a 50% debt ratio. I’ve seen one lender that goes to 65%. And even that’s in very special cases only.
Another factor that the underwriter will look at pretty closely on any VA loan, but especially on the manual underwrite is residual income.
Residual income is defined as your take-home pay, minus the mortgage payment, including taxes and insurance, minus the HOA dues, minus expected utilities on the new property, minus monthly minimum payments on all other debts, minus anything owed for alimony or child support minus child care expenses.
One thing that’s unique with VA loans is the child care expense requirement. Other loan programs do not factor this expense in for their underwriting.
The reason the residual income requirement is so important is because it’s seeing what you have available to spend for your family. Per the VA Handbook, there are minimum residual income requirements that must be met for VA mortgage approval.
Here is the current 2024 residual income chart.
| Region | States Included |
|---|---|
| Northeast | Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont |
| Midwest | Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin |
| South | Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, West Virginia |
| West | Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming |
| Family Size | Northeast | Midwest | South | West |
|---|---|---|---|---|
| 1 | $390 | $382 | $382 | $425 |
| 2 | $654 | $641 | $641 | $713 |
| 3 | $788 | $772 | $772 | $859 |
| 4 | $888 | $868 | $868 | $967 |
| 5 | $921 | $902 | $902 | $1,004 |
| Over 5: Add $75 for each additional member up to a family of seven | ||||
| Family Size | Northeast | Midwest | South | West |
|---|---|---|---|---|
| 1 | $450 | $441 | $441 | $491 |
| 2 | $755 | $738 | $738 | $823 |
| 3 | $909 | $889 | $889 | $990 |
| 4 | $1,025 | $1,003 | $1,003 | $1,117 |
| 5 | $1,062 | $1,039 | $1,039 | $1,158 |
| Over 5: Add $75 for each additional member up to a family of seven | ||||
Add $75 for each additional member up to a family of seven
For example, if the loan amount is $80,000 or above and in the Midwest you will need $441 a month in residual income.
If it’s a family of 5 this requirement becomes $1039 a month.
Source: VA Handbook Chapter 4
If getting a VA manual underwrite, your residual income will need to be at least 20% above the VA minimum standardso
Take the 30 second mortgage quiz to see if you qualify
Compensating factors are strengths in your financial profile that can help balance out areas of concern. The VA explicitly states that these factors must go beyond normal program requirements. For example, while a “good” credit score of 650 may not compensate for low residual income, an “excellent” score of 800 might.
VA lenders consider several compensating factors, including:
Let’s say your DTI ratio is slightly higher than the recommended 41%. In this case, having substantial liquid assets or an excellent credit score could help offset this concern. Underwriters analyze your loan file based on the three C’s: Credit, Capacity, and Collateral. Compensating factors can strengthen your profile in these areas.
Compensating factors become particularly crucial in manual underwriting scenarios. For instance, some VA manual underwriting guidelines allow for higher DTI ratios (up to 50% back-end DTI) if the borrower has at least two strong compensating factors.
It’s important to note that there are also negative factors that can hurt your application:
These negative factors can outweigh positive compensating factors, so it’s crucial to maintain a clean financial record.
To improve your chances of approval:
Take the 30 second mortgage quiz to see if you qualify
The following table shows the differences in minimum standards of VA home loans vs other mortgage types.
Lenders may add their own standards (also known as lender overlays) over and above the guidelines listed.
| Type of loan | Minimum credit score | Waiting period after Chapter 7 bankruptcy (without extenuating circumstances) | Waiting period after foreclosure (without extenuating circumstances) |
|---|---|---|---|
| VA | No minimum score requirement | 2 years | 2 years |
| FHA | 500 to 579 (with a 10% down payment) 580 (with 3.5% down payment) | 3 years | 3 years |
| Conventional | 620 | 4 years | 7 years |
| USDA | No minimum score requirement | 3 years | 3 years |
Here are some frequently asked questions about VA home loans and bad credit.
Yes, it is possible to get a VA loan with bad credit. The Department of Veterans Affairs (VA) doesn’t set a minimum credit score requirement. However, most lenders have their own credit score minimums, typically around 620. Some lenders may approve loans for borrowers with scores as low as 580 or even 500.
While definitions vary, FICO scores below 580 are generally considered “poor” credit. Scores between 580 and 669 are often labeled as “fair” credit. However, many VA lenders consider scores below 620 as challenging.
No, the VA itself doesn’t set a minimum credit score. The VA focuses on the overall loan profile rather than just the credit score. However, individual lenders typically have their own minimum credit score requirements.
A lower credit score can lead to a higher interest rate on your VA loan. Lenders typically view higher credit scores as indicative of lower risk, often resulting in more favorable interest rates.
Take the 30 second mortgage quiz to see if you qualify
Yes, it’s possible. If you don’t have a traditional credit score, VA lenders can use alternative credit data such as rent, utility, car insurance, and other payment histories to make an approval decision.
The VA loan program is more forgiving of past financial difficulties than conventional loans. You may still qualify for a VA loan after bankruptcy or foreclosure, although there is a two year waiting period.
To improve your chances:
Some lenders market themselves as options for “bad credit” VA loans. However, be cautious and carefully review the terms, as these loans may come with higher costs or fees.
VA lenders also look at:
Yes, VA lenders may consider compensating factors to strengthen your application. These can include:
While it can be more challenging, it’s not impossible. The VA loan program is generally more flexible than conventional loans, especially for veterans with financial challenge.
The best place to get approved for a VA home loan with bad credit is through a mortgage broker.
I can originate VA mortgage loans anywhere that I’m licensed.
I’m licensed in Alabama, Arkansas, Arizona, California, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington, and Wisconsin.
Additionally, our team can originate mortgages in several additional states through our corporate referral program.
Those are some basic standards for no credit and bad credit VA loans.
As always, if you have any questions or comments or concerns, please feel free to contact me.
Take the 30 second mortgage quiz to see if you qualify
If you’ve been denied for a VA home loan by major lenders like Veterans United or Rocket Mortgage, don’t lose hope. You still have a strong chance of getting approved. The reason? Many big online lenders enforce additional rules known as lender overlays, which go beyond what the VA itself requires.
Manual underwriting is a process that involves a human underwriter reviewing an applicant’s financial information instead of an automated system. This process can be used for VA loans when the VA’s algorithm doesn’t approve an applicant, or when an applicant has certain negative items in their credit history.
Are you worried about your credit history affecting your chances of getting a VA home loan? In this video, we break down the VA’s rules regarding credit occurrences and explain how you can potentially overcome credit challenges.
Take the 30 second mortgage quiz to see if you qualify
