Buying a House with Bad Credit: Military & VA Loan Guide

• Bad credit does not prevent Veterans from buying a home—VA loans are designed to be more forgiving than traditional mortgages.
• VA loans remove many common barriers, including down payment requirements and private mortgage insurance, even for borrowers with lower credit scores.
• Lenders look at the full financial picture, so steady income, manageable debt, and preparation often matter more than your FICO score.

If you’re buying a house with bad credit, it can seem like owning a home is a distant dream these days. Thankfully, even with bad credit, veterans can own a home through one of our greatest benefits, VA home loans. In this guide, we show you everything you need to know to have the best chance of buying a house with bad credit and no money down, thanks to VA home loans.

The answer is yes, especially if you are a Veteran. It’s often possible to get a VA home loan with challenged credit, especially if the rest of your finances are strong.

But what exactly does it mean to have bad credit?

The VA doesn’t set a minimum credit score. That decision is left to individual lenders, each of which applies its own underwriting standards (known as overlays). In other words, it’s the lender that determines whether your credit qualifies instead of the VA.

The good news is that VA loans are generally more forgiving of credit issues than conventional mortgages. And your credit score isn’t the only factor lenders consider.

Many lenders view a FICO score below 620 as “challenged” credit, but that cutoff varies. Some borrowers with scores under 620 may still qualify for a VA loan, depending on their overall financial picture.

Because the VA guarantees a portion of eligible members’ loans against default, most lenders are more willing to look past some dings on your credit report than they otherwise would be.

To understand why, you should understand how the VA loan guarantee works.

A VA loan is a mortgage backed by a partial guaranty from the U.S. Department of Veterans Affairs. That guaranty reduces the lender’s risk, which allows for more flexible credit standards than many conventional loans.

Many VA-approved lenders work with borrowers with credit scores between 580 and 620. And your FICO score isn’t the only factor they consider. Lenders look at your whole financial picture, including income stability, debt-to-income ratio, residual income, and recent credit history.

Approval at lower scores often depends on compensating factors like steady income, manageable debt, high residual income, and a clean recent payment record.

Lenders also rely on the home appraisal to confirm the property’s value matches the loan amount.

When I purchased my first home, the clear choice was applying for a VA loan. Many Veterans see them as a lifeline and for good reason. VA loans are designed to help Veterans as a way of thanking them for their service. Here are a few of the reasons these loans are perfect, even if you have poor credit.

• No down payment: In most cases, eligible Veterans can buy a home with no down payment, as long as the purchase price doesn’t exceed the appraised value and sufficient entitlement is available.
• No Private Mortgage Insurance (PMI): Unlike conventional loans that require PMI with less than 20% equity, VA loans don’t charge PMI. The VA’s guaranty reduces lender risk, which can save borrowers hundreds of dollars per month.
• Lower interest rates: VA loans often come with lower interest rates than conventional loans for borrowers with similar credit profiles, even when credit isn’t perfect.
• Flexible underwriting: VA lenders look beyond your credit score to evaluate your complete financial picture, including income stability, debt-to-income ratio, residual income, and recent credit history.

It all means that even with a score around 600, you may still qualify if your debt-to-income ratio is manageable, you’re current on your payments, and your credit utilization is under control.

Believe it or not, the VA doesn’t have a minimum credit score requirement. Individual lenders set their own guidelines for what qualifies a loan for approval or denial. In general, when evaluating borrowers with bad credit, most lenders will consider a FICO score between 580 and 620. It’s important to remember that it’s not just about the FICO score with VA loans. The other factors important to lenders for VA loan applications are a stable income, a low debt-to-income ratio, a Certificate of Eligibility (COE), and an appraisal of the property you wish to purchase.

So, now that you know getting a VA home loan with bad credit is possible, how do you go about it? Here are five simple steps that can help you begin the process of achieving your piece of the American Dream.

• Step 1: Know your credit score. You can get free credit reports from Equifax, Experian, and TransUnion through AnnualCreditReport.com weekly online (and at least once every 12 months by law). If you can, do your best to pay on time and use less than 30% of your available credit.

• Step 2: Get your Certificate of Eligibility (COE). A COE is your proof from the VA that you meet the eligibility requirements that allow you to benefit from a VA loan. You can get this online with the VA in seconds.

• Step 3: Get preapproved early. A VA loan preapproval gives you a clearer picture of how much home you can afford and shows sellers that you are a serious buyer. It also allows lenders to identify and address potential issues before you make an offer.
• Work with lenders who understand VA loans and the needs of Veterans and service members. You’ll save yourself a lot of headaches if you work with people who understand the unique needs of those who served their country.

• Step 4: Explore no-money-down VA loan options. Many eligible borrowers can buy with no down payment when the price is supported by a VA appraisal, freeing up cash for moving expenses and reserves.

• Step 5: Use AHRN to find verified homes near your base. A solid preapproval shows the price range you can realistically afford and helps you compete with other buyers. It also gives your lender time to address any credit or documentation issues before you’re under contract.

Before you apply for a VA loan, it’s never a bad idea to work on improving your credit. Even with only a few months before you apply, you can make a difference in your score with very little effort.

While you’re still in the planning phase, it’s a good idea to get a free copy of your credit report from each of the three major credit bureaus and make sure you’re completely current on everything with no delinquencies before you put in your mortgage application.

Here are some of the best ways to improve your credit score and your chances of mortgage approval.

• Bills: Paying your bills on time is key. At a minimum, make sure all bills are paid on time for at least three to six months before you apply.

• Credit utilization: Having credit is one thing. Using it is another. The more credit you use, the more it hurts your score. Keep your credit utilization below 30%.

• Avoid openings and closings: Major accounts should remain open, and you should avoid opening new accounts for at least a few months before you apply for a VA loan.

• Dispute errors: When you get your annual free reports from the credit bureaus, take the time to go through them and correct any errors. You’d be surprised how many people have lower scores than they should because of inaccurate information on their credit report.

• Secured credit card: If your score is low, try getting a card with secured credit. This means you pay in advance for the credit on the card. For example, you pay a credit card company $200, and in exchange, they send you a card that lets you charge up to $200. If you keep paying it off each month as you use it, having the card will improve your score.

Doing these small things can increase your score by 20 to 40 points in a very short time.

If you follow the steps above and work to improve your credit before applying, you have a great chance of getting a VA home loan. With no down payment and with lenders feeling like you are less risky, thanks to the federal government guaranteeing the loan, you get lower rates and no PMI. It’s a win-win scenario.

Thanks to the VA loan guaranty and your eligibility as a Veteran, lenders are often able to offer more flexible approval standards than they would for comparable conventional loans.

For example, let’s say you want to buy a $300,000 home. A conventional loan may require you to put 5% down and pay PMI. That’s $15,000 you need to provide upfront and several hundred extra per month on top of the mortgage payment. In the same situation, with a VA loan, you pay nothing down and no PMI. That saves you $15,000 upfront and several hundred each month.

While VA loans do not require a down payment or private mortgage insurance, most borrowers must pay a VA funding fee. This one-time fee helps offset the cost of the VA loan program and can often be rolled into the loan.

Veterans who receive VA compensation for a service-connected disability (and certain eligible survivors) are generally exempt from the VA funding fee.

You can see now how, even with bad credit, you can get a home loan much more easily with a VA loan. Here are a few more quick tips that can help you if you have bad credit.

• Tip 1: Work with the right lenders. Work with lenders who have experience with service members and Veterans.

• Tip 2: Be honest. Many people face challenges that can lead to poor credit. Be upfront with lenders about your situation. This helps them find the best program for you.

• Tip 3: Get pre-approved early. The earlier you get pre-approved, the better. By getting pre-approved, you know the loan amount the VA will guarantee, which helps the lender say yes to you.

• Tip 4: Avoid new debt. If you want a home in the next few months, avoid getting new car loans, additional credit cards, or other types of debt. It will only hurt your chances of getting approved if you do.

• Tip 5: Have a steady income. Consistency is key. Lenders want to see that you are regularly making money.

If you follow these tips, you can make a big difference in whether lenders will approve or deny your VA loan application.

Now, in case you do not qualify, all is not lost. You can take a break and work on building your credit for a few more months or take advantage of other types of loans.

Other potential options include FHA loans or USDA loans, depending on your location, income, and eligibility. These programs have different credit, income, and property requirements than VA loans.

Yes, VA loans offer service members and Veterans an excellent chance of getting approved for a home loan.

Yes, because VA loans offer lenders government guarantees, even borrowers with bad credit can be approved.

Make sure your debt is manageable and work to improve your credit score.

Bad credit doesn’t mean the American Dream is out of reach. As a Veteran, the federal government wants to do everything it can to get you into a home. You can overcome bad credit with a loan guaranteed by the VA.

With a VA loan, you are more likely to get approved and have the best rates, even with low FICO scores. Start your path to homeownership with AHRN today.