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Bad Credit and VA Loans



June 19, 2017

The term “bad credit” is a relative one but in the eyes of a mortgage company, bad credit is associated with a three-digit credit score. A credit score can range from 300 to 850 with a higher score representing better credit. Borrowers who are VA eligible might be surprised to learn that the VA doesn’t require a certain minimum credit score whatsoever but instead lenders must make a reasonable determination as to the creditworthiness of the applicant. However, even though the VA doesn’t require a minimum most VA lenders do and that score is 620. It doesn’t mean that a score below that won’t get approved, it’s just the likelihood is lower. In fact, recent changes with the VA home loan program issued by the VA allows for an approval with a score as low as 500. But again, that doesn’t guarantee an approval for someone with bad credit.

If an applicant is turned down because of bad credit, there should be a conversation with the loan officer who can point out why the approval system rated the scores below what’s needed for an approval. Most often it’s due to one of two of the five most important scoring factors…payment history and available credit. If borrowers can return to timely payment patterns and eliminate payments made more than 30 days past the due date, scores will recover rather quickly, as in within a couple of months. If loan balances are kept around one-third of available credit, scores will also heal. These two factors make up nearly two-thirds of the entire score.

When refinancing however there is another path to get a VA loan with bad credit. If refinancing an existing VA loan with another VA loan, it’s called a streamline refinance. With a streamline there is no need to verify income. Nor is there any need for an appraisal and other time and money saving features. With the VA streamline, there is no credit report pulled so no credit scores are reviewed. The only credit guideline the VA requires is that there be no more than one payment made within the previous 12 months made more than 30 days past the due date and no such late payments within the previous six.

If you’re VA eligible but think you can’t get an approval because of your credit, don’t make the decision not to apply for a mortgage to buy a home or refinance on your own. You might very well be surprised and even if you can’t be approved right now your loan officer can provide you a road map for an approval.

For more information or questions about mortgage loans, please call  (855) 757-8748.

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