The Department of Veteran Affairs (VA) offers Service members, Veterans and their spouses the opportunity to become homeowners. VA Home Loans provide a guarantee for a portion of the home loan which enables lenders to offer more favorable loan terms.
For clarification, a VA Home Loan is not a loan from the VA. It is still a loan from a traditional lender (bank or mortgage company) but the VA Home Loan program has special features that are only available to those who qualify.
VA Home Loan Features
- No downpayment is required by the VA program. However, a lender may require a downpayment for some borrowers.
- Competitively low interest rates
- Limited closing costs
- No Private Mortgage Insurance (PMI) needed
- The VA home loan is a lifetime benefit. You can use it more than once.
It should be noted that borrowers are not automatically approved for a VA loan. A borrower will still have to meet eligibility requirements set forth by the lender (i.e. credit scores, credit history, income).
One of the major benefits of the VA Home Loan program is that lenders understand that a military family may have financial issues that are unique and not common to civilians. Instead of only looking at whether they have good or bad credit to determine eligibility, lenders should look at your entire financial picture.
What is Considered “Bad Credit”?
The VA program has no provisions to determine what is “bad’ credit, but lenders have a set of traditional guidelines that include the following:
FICO Score under 600.
Not having a solid 12 months of on-time payments on all financial obligations leading up to the time of a home loan application.
Having a foreclosure or bankruptcy on record that has not been fully discharged or settled.
What if My FICO Score is Low?
While the VA does not have a set FICO score requirement to qualify for the program, the lender that a borrower chooses may have a preferable range of scores. Your score does not need to be as high as a traditional home mortgage loan because of the guarantee that the VA provides for your loan.
Most lenders prefer FICO scores in the mid-600s for a VA loan for the most favorable rates and terms. However, if your score is in the low 600s or below, you may be able to find a lender that will work with you, especially if you have a down payment or you agree to a higher interest rate.
Will I Need a Down Payment?
The VA Home Loan program means that there is NO down payment required. This can be a great savings for borrowers. However, if you have a low FICO credit score, a lender may require a down payment. A low score translates to you being a bigger risk as a borrower which means there is a higher chance that you would default on your loan.
Therefore, a down payment would be a way to compensate and show the borrower that you are an acceptable credit risk despite past credit mistakes. If you are not able to make a down payment, you may be able to negotiate other terms like a higher interest rate.
All mortgage companies and banks are not alike. They can each set their own requirements and terms and all of it can be negotiated. It is a good idea to speak to 2-3 lenders to find out who can provide you with the most favorable mortgage loan terms. It may also be in your best interest to speak to a company that specializes in VA loans.
Can I Fix My “Bad Credit”?
Just like a traditional home mortgage loan, a VA Home Loan will have better terms for you if you have “good credit”. There are ways that you can improve your credit and get the best possible outcomes for you and your family. It may take time, but it will prove to be worthwhile.
- Don’t waste money or time on “quick credit repair” companies. This is one of those times when old-fashioned hard work is best.
- Do your best to pay off or pay down financial obligations. Get all credit card balances to below the 50% mark of the credit limit.
- Establish a minimum of 12 straight months of on-time payments on all lines of credit.
- Decrease your debt-to-income ratio. (This is just as important as your credit score!) Added up, all of your monthly financial debt obligation should not be more than 40% of your income. Paying down balances (making payments larger than the minimum payment) and paying off credit lines will help you get this percentage down.
What if I Have a Foreclosure or Bankruptcy?
A foreclosure or bankruptcy is usually a big red flag to lenders. However, with the VA Home Loan program, lenders are required to look at your entire financial story so a past mistake doesn’t necessarily rule you out!
There is a “seasoning” period after a foreclosure or bankruptcy that is a length of time you must wait before applying for a VA home loan. This seasoning period varies depending upon the type of issue and starts when the procedure has been fully discharged. It does NOT begin when filed. If it takes a year to settle the case, the seasoning period begins at the date of settlement.
Typically, with a traditional home loan for civilians, there is a 7 year seasoning period, but with VA home loans, it is usually around 2 years. The VA also requires that during this time, you work towards “healthy” credit and responsible credit use.
Is it Worth Applying for a VA Home Loan if I Have Bad Credit?
There is no short answer to this question. The VA Home Loan program definitely makes it easier for you to secure a loan compared to a traditional home loan.
Depending on the severity of your bad credit, you may have to seek out several lenders to find out what your options are. You will also need to determine if you are willing to concede to other terms from the lender (possible down payment or higher interest rate) with bad credit.
You should also take into consideration the effect that increasing your credit score and improving your credit habits could have on the terms of a VA home loan. It may be worth it to fix these things before applying.
Lastly, no matter what your credit situation is, it is recommended that you shop around for a VA home loan. Banks and mortgage companies are not all the same and most have a margin that they can negotiate with to give you and your family the best options.
At Primary Residential Mortgage, Inc. (PRMI) Wooster, we have extensive experience with the VA Home Loan Program and would be happy to start a conversation with you. Contact us today to set up a time to talk.
*Closing costs and fees may still apply.
VA home loan purchases, have options for 0% down payment, No private mortgage Insurance requirements, competitive interest rates, with specific qualification requirements. VA Interest rate reduction loans (IRRRL) are only for Veterans who currently have a VA loan, current loan rate restrictions apply, and limits to recoupment of costs and fees apply. VA Cash-out Refinances are available for Veterans with or without current VA loans. Policies and guidelines may vary and are subject to the individual borrower(s) qualification. Program and Lender overlays apply.