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How to Use a VA Loan with Bad Credit

How to Use a VA Loan with Bad Credit

Bad credit can make homebuying difficult but not impossible – especially for veterans! If you meet the basic eligibility requirements for a VA home loan, this is one benefit that can change your life!

Who qualifies for VA loans?

The rules are simple. There are two groups of people who qualify for VA loans: military/veterans and the spouses of deceased military/veterans.

If you have served in the military… You must be a veteran, active duty service member, National Guard member AND you must meet one of the three requirements below to qualify for a VA home loan.

  • You have served 90 consecutive days of active service during wartime.
  • You have served 181 days of active service during peacetime.
  • You have more than 6 years of service in the National Guard or Reserves.

If you are a spouse… You must be the widow or widower of an eligible service-member who died in the line of duty or as a result of a service-connected disability.

What are the benefits of VA loans?

A VA Loan has several huge benefits that make them desirable options for those who qualify.

No down payment. On other mortgages, you’ll be expected to put a significant amount of cash down on your home purchase. That means you’ll need to save, usually for years, before you’ll be able to buy a home. For low income veterans, this can be a huge deterrent to home ownership.

With a VA loan, you are not required to have a down payment at all. Not a single penny! For veterans who live paycheck to paycheck, this is a huge benefit.

No mortgage insurance. FHA loans and other programs that require less than a 20% down payment require mortgage insurance. Mortgage insurance helps compensate lenders or investors for the losses they suffer if buyers default, or stop making payments. On a $150,000 loan, this insurance can cost $115 per month!

Since a VA loan is insured by the Department of Veterans Affairs (and therefore the federal government), you are not required to have mortgage insurance. This is a significant monthly savings!

Lower average interest rates. Since the VA (and therefore the federal government) insures these loans, financial institutions suffer less risk with these mortgages. Therefore, interest rates are typically lower than most mortgages.

Limitations on closing costs that protect you and help you save money. This means that the VA sets the rates that you’ll pay for certain services instead of the lender or other provider. This protects you from predatory companies that would overcharge you for simple services.

A property appraisal is an essential step of the VA loan process. The VA appraisal is not an inspection. It is used to determine the property value and ensure that you are paying a reasonable amount for the property. It also ensures that the condition of the property meets VA guidelines. The VA requires that homes are safe, structurally sound and do not pose any health hazards.

Lower credit requirements. Again, since the VA backs these loans, lenders are at less risk. There is no set credit score requirement for a VA loan. The financial institution who issues your loan will set its own credit requirements.

However, the VA does instruct lenders to analyze the credit report and the VA has set requirements regarding the type and quality of the credit report used. For example, it must contain 24 months of employment and residency history. The VA also has guidelines for applicants who have no credit history at all. In that case, lenders are instructed to make a determination based on the applicant’s history of utility, rent, insurance and other expense payments.

In the Lender’s Handbook, the VA also makes allowances for re-established credit, collections accounts, disputed accounts, bankruptcy, prior foreclosures and other factors of credit-worthiness. For example, the VA states that “satisfactory credit is generally considered to be re-established after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item was filed.”

The VA also states that “Housing expense payment history is often the best indicator of how motivated the applicant is to make timely mortgage payments in the future.” In our case, we had poor credit but hadn’t been late on our rent in years. Our perfect housing expense payment history was tremendously helpful when we applied for our VA loan.

Ultimately, these are the VA’s guidelines for guaranteeing loans and the requirements of your actual lender may vary. In my experience, it pays to shop around for a VA loan! We were originally told we would need to have our credit up to 650 for a VA-backed mortgage. We then found a lender that required 620… and then 580. I highly recommend shopping around for the right lender.

What can I buy with a VA loan?

The VA does set Minimum Property Requirements, so you will need to ensure your property meets these requirements if you want to obtain a VA loan. These minimum requirements include:

You must buy a residential property. You cannot purchase businesses, storefronts or commercial properties with a VA loan.

You must have adequate living space. You must have enough space for living, sleeping and cooking. If you cannot do those things, you cannot buy that property with a VA loan.

The property must be usable and safe. That’s why they require you to undergo a property appraisal as part of the VA loan process. Asbestos and lead paint can complicate a VA loan process. The construction of the home will be evaluated to ensure that it is not defective. The VA appraisers ensure that the property meets safety and usability criteria.

The home must be adequately heated. The home’s heating system must be operational and capable of holding the home’s temperature above 50 degrees Fahrenheit.

The home must have an adequate water supply. Your home doesn’t necessarily need to be connected to a public water supply but it does need to have access to safe water and a water heater. The home must also have an adequate, functional sewage disposal system to protect your fresh water. The water quality will be tested as part of your VA loan process.

The roofing, basement and crawl spaces must be adequate and problem-free. The VA evaluates aspects of your home, such as your roofing, electrical and plumbing, for future usability. If it is likely to fail or has issues, you may run into problems during your appraisal. Although the VA doesn’t set a definite number of years for future usability, many lenders do.

This isn’t an exhaustive list. You can find the exact list of Minimum Property Requirements by downloading Chapter 12 of the Lenders Handbook from the VA website.

How do I get a VA loan?

The VA only insures the loans; they don’t actually fund the loans. You will need to find a financial institution that provides VA loans. Every bank will have its own credit requirements and it can take a while to find the right financial institution for you.

When you contact a new financial institution, always ask what their minimum credit score requirements are for VA loans. Most of them will tell you upfront. Always ask before they pull your credit, since each credit pull negatively impacts your credit score! 

Once you identify your ideal lender, you’ll need to come prepared. There are several documents you will need to bring, including…

Your Certificate of Eligibility (COE) for a VA Loan. Proving your eligibility is easy! Simply log in to eBenefits and select “Manage,” “Housing,” and then “Certificate of Eligibility for Home Loan.” You may need to complete an electronic application before the certificate will be available to print.

Your DD214 or Statement of Service. Even with your Certificate of Eligibility, you’ll still need to supply your DD214 (for veterans) or Statement of Service (for active military). When we signed our mortgage paperwork, the stack was several inches thick. Nobody loves paperwork quite like a mortgage lender!

Your proof of income statements. You’ll need to bring all your income statements, including pay stubs, W2s, service-connected disability benefits and proof of any other income you receive. Even though the VA does not require a minimum credit score, they do have income requirements that must be met in order to qualify for a VA loan.

Photo ID, social security cards and other documentation as required by your lender.

Veterans get FREE stuff!

Nicole leads the Low Income Relief team with over 20 years of professional research and writing experience. Nicole started Low Income Relief after a personal experience with poverty. When her husband was medically discharged from the US Army, their family experienced tremendous financial hardship. Nicole was able to gather help from multiple community agencies and move into a nearby low income housing unit in just two weeks! Since then, Nicole has been dedicated to helping low income families in crisis. She regularly spends hundreds of hours combing through countless resources to make sure that Low Income Relief has the most comprehensive and complete resource directories on the internet today. Prior to starting Low Income Relief, Nicole worked as a novelist, journalist, ghostwriter and content creator. Her work has been featured in various print and online publications, including USA Today, eHow, Livestrong, Legal Beagle, The Daily Herald, The Chronicle and more.


Saturday 25th of November 2017

What about people who weren't military and are slowly building their credit and want to buy a house on low income? Any help for us? I'm tired of living in an apartment, and a house payment would be cheaper than rent!!!


Monday 27th of November 2017

Hey, Star! That's an excellent point. I'll look into this and see what I can find. :)