When it comes to securing a mortgage, your credit history matters. Borrowers with excellent credit can expect to be offered more options and better terms, but you aren’t necessarily out of luck if your credit is less than stellar. Are you eligible for a VA loan? If so, exploring how to get a VA loan with bad credit should definitely be on your list of things to do. Because this type of loan is guaranteed in part by the U.S. Department of Veterans Affairs, VA loans generally come with favorable terms and more forgiving standards.
Why a VA Loan Is a Good Choice If You Have Bad Credit
Some 20 million loans have been made since the VA loan program began back in 1944. While the VA doesn’t actually provide the loans, it encourages lenders to offer qualifying veterans favorable terms by guaranteeing each loan, reducing the lender’s risk.
As a result, VA loans tend to come with lower interest rates. And a lower rate means the borrower will enjoy substantial savings over the life of the loan. VA loans also don’t require a down payment, so borrowers don’t have to wait until they scrape together a lump sum before taking the plunge into homeownership. In addition, VA loans allow borrowers to skip mortgage insurance. Since premiums for mortgage insurance can tack on hundreds of dollars to a monthly mortgage payment, the ability to forego this insurance is a considerable benefit. VA loans also come with no prepayment penalty, which will come in handy if you hope to refinance when your financial situation improves. Finally, and perhaps most importantly if you have poor credit, VA loans generally have relaxed credit standards.
How to Get a VA Loan with Bad Credit
Regardless of the status of your credit, your first step in getting a VA loan involves discovering whether you are eligible for this entitlement. Visit the VA’s website to determine if you meet the basic qualifications needed to secure a Certificate of Eligibility. While verifying that you’re eligible is an important first step, it is just the beginning. To secure a VA loan, you’ll also need to convince a lender that you have the appropriate income and credit. What can you do if your credit score is poor? Use the tips below if you’re wondering how to get a VA loan with bad credit.
Improve Your Credit
The better your credit is, the more likely you are to secure the loan that you want. Although you probably won’t be able to transform a bad credit score into a perfect one overnight, you may be able to raise your score with a little time and effort. If you want to improve your credit, The Balance suggests the following:
- Check your credit reports for mistakes. If you spot something wrong on your credit reports, dispute it. Contact the credit bureaus with proof of the mistake to have it removed and boost your credit score.
- Avoid taking on new debt. New debt makes mortgage lenders wary, so it’s best to avoid incurring any when you’re planning to apply for a mortgage. Since credit inquiries can lower your credit score, wait to apply for new credit cards until after you’ve secured your VA loan.
- Reduce your debt-to-income-ratio. If you want to persuade a lender that you are financially capable of paying a mortgage, aim to bring your monthly debts to 12 percent or less of your monthly income.
- Pay off any outstanding delinquent accounts. Late payments are red flags for lenders, so if you have any outstanding delinquent accounts, pay them off. Then, establish a pattern of on-time payments to show that you have your finances in order.
Have Your Explanation Ready
A poor credit score doesn’t necessarily doom your mortgage application, but it does mean that you should have an explanation ready (source). Is a lack of credit history responsible for your low credit score? Did a serious injury or illness force you into bankruptcy? Were late payments the result of a lost job? Having documentation on hand to back up your explanation and offering evidence that you are now behaving in a financially responsible way can help you overcome a low credit score and secure a home loan.
Build a Bigger Down Payment
Although down payments are not required for VA loans, they are allowed, and putting down a big down payment can help convince a lender that you’re a good risk despite a shaky credit history. As Dividend.com explains, this down payment jump-starts your efforts to build equity in your home, and increased equity provides your lender with reassurance that they will be repaid. As an additional bonus, a bigger down payment reduces the amount you need to borrow, leading to lower monthly payments.
If you have questions about how to get a VA loan with bad credit, talking with a financial professional can be incredibly helpful. For more information about VA loans, how the mortgage process works, and other financial topics, contact PrimeLending: Manhattan, Kansas.
Every year, we help thousands of veterans and active-duty members of the military buy or refinance their homes through the VA home loan program. With our assistance, you can take advantage of the many benefits of a VA loan while saving money due to our lack of lender fees. We offer 100% financing with competitive interest rates – no down payment or PMI required! And we would be happy to help you learn how to get a VA loan with bad credit. To learn more, please give us a call at 785-560-3011 or contact us online. It’s our turn to serve you!