Veterans Assistance (or VA) home loans are guaranteed loans offered through private lenders, such as mortgage companies and banks. By guaranteeing the loan, the VA is essentially promising the lender that its loan to you is protected if you default. This guarantee only replaces the typical down payment requirement, and you still need ample credit to get approved for the loan itself.
Minimum Credit Score
While secondary lenders prefer a score of over 620, there is no minimum credit score for VA loans. However, you should know your credit score before talking to a lender. The reasons behind your credit score could hinder you from an approval.
A debt-to-income ratio is the most important factor when you apply for a VA loan. This ratio compares your monthly expenses with your monthly income. If you're applying for a joint application, the lender will consider both you and your spouse. Your expenses include credit cards, investments, student loans, car loans and mortgage payments. The VA program accepts a maximum debt-to-income ratio of 41 percent. Therefore, if you have bad credit but a low debt-to-income ratio, you may still be approved. If your debt-to-income ratio is higher than 41 percent, you should work to pay that down before applying.
Your lender is interested not only in your credit score but also in the history behind that score. A person with a bad credit score is able to re-establish a positive credit history to make him eligible for a VA loan. You should exhibit two years of positive payment history, remove negative items and take care of collection accounts on your credit report. Since VA lenders consider applicants on a case-by-case basis, provide letters of satisfaction from creditors, receipts and canceled checks proving you have paid your debts. Bankruptcies do not automatically disqualify you for a VA loan. Instead, you need to pay off the debts listed in your bankruptcy repayment plan or show a positive, re-established credit history. This can be done by opening a credit card account and paying it regularly.
The VA takes applications on a case-by-case basis. Therefore, if you have bad credit due to extenuating circumstances, such as a prolonged illness or work-related injury, the VA allows you to get a home loan within one year from the event.
The VA allows you to have a co-signer, as long as he is an eligible veteran. If your bad credit is holding you back from approval, consider having a family member or close friend who is eligible cosign on your home loan. Your co-signer needs to have a certificate of eligibility and follow the same credit history and debt-to-income ratio requirements as if he is applying for the loan himself.
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