• 22 Jan, 2024

Can I get a VA loan approved with a 500 credit score?

Va Home Loan First Time Buyer Handbook: Eligibility, Advantages & Tips

VA loan with 500 credit score: Is it possible?

First, let’s have a quick recap of VA loans. They are one of the common loan options available for veterans, and active duty service home buyers. The loan is guaranteed by the Department of Veterans Affairs.

With that said, the good news is that you can get a VA loan with a 500 credit score. There are low-credit mortgage lenders who offer loans to veterans with bad credit scores. Keep reading to know the requirements to qualify.

VA home loan first time buyer eligibility requirements

Buying a first home is a major achievement in a person’s life. If you want to create your next special moment, then go ahead and meet these eligibility criteria.

• You served as an active service member for 90 consecutive days during wartime.

  
  

• You have completed 181 days of active peacetime service.

  
  

• You have an active duty service of 6 years in the National Guard or Reserves, or serve 90 days (at least 30 of them consecutively) under Title 32 orders.

  
  

• You’re the spouse of an active service member who died during a service related disability.

  
  

Apart from the above, it is also essential to have a certificate of eligibility. It is a document specifying your active service period along with the minimum service requirements.

COE is one of the main documents that allows your lender to confirm that you qualify for the VA loan benefits. The process of obtaining a COE is not difficult at all. Many lenders do it with your social security number and date of birth.

There’s no need for you to have this document in hand before applying for a VA loan. This needs to be submitted to your lender, only when they request you to provide them with the necessary documentation.

Let’s now move on to understanding the details of getting a VA loan with no credit.

Can you get a VA loan with no credit?

Simply put, yes! That’s one of the VA home loan first time buyer advantages. You need not have a well-established credit history to get your VA loan approved.

Start your VA loan application with Home Loan Rate of Interest and get your pre-approval today.

But still, there are some considerations to keep in mind. If you don't have an established credit history or your credit score falls below the required minimum score for a standard VA loan, you might need to explore alternative methods to demonstrate your creditworthiness.

The main reason why lenders ask for your credit scores is to assess their risk of lending money. So, even if you don’t provide your lenders with a credit history, it is essential to provide these 2 below:

1. Alternative tradelines

   
   

   • They refer to monthly payments for various services that are not reflected in your credit bureaus.

     
     

   • What that means is they don’t appear on your credit report, and these payments can be utilized to demonstrate your financial responsibility and ability to consistently meet your financial obligations.

     
     

   • Lenders may consider these alternative tradelines as indicators of your creditworthiness when assessing your eligibility for loans or credit.

     
     

   • Here are examples of alternative tradelines – Rent, utilities, insurance, storage units, and cell phone bills. These are regular financial commitments that showcase your ability to manage various expenses and pay them in full and on time.

     
     

   • Lenders often welcome a diverse financial history, and alternative tradelines like these can contribute to your VA loan approval as they provide a broader picture of your financial habits. This feature goes beyond what is reflected in your credit report.

     
     

   • While the policies and guidelines of alternative tradelines can vary among lenders, many typically prefer to see the bills of your 12-month payment history.

     
     

   • This extended history allows lenders to assess your consistency in meeting financial obligations over time, enhancing their confidence in your creditworthiness.

     
     

2. A co-signer

   
   

   • Adding a co-signer is another powerful tool to improve your VA loan approval success.

     
     

   • Don’t get confused with a co-signer and a co-borrower. Essentially, the co-signer acts as a guarantor, providing an extra layer of assurance to the lender, and doesn’t share the debt payments with you.

     
     

   • Why do lenders consider a 500 credit score VA loan? When your co-signer's credit score is higher, it can help compensate for the lack of your credit history.

     
     

   • This addition can strengthen the overall application and increase the likelihood of your loan approval.

     
     

   • But, here’s the catch! VA loans have a set of restrictions on who you can bring in as a cosigner, and as per the VA rules, only a spouse or an unmarried member of the military can serve as a cosigner for a VA loan.

     
     

These are the 2 ways you can prove your creditworthiness, even if you don’t have a proper credit history. Make sure you check with your lender's requirements before you arrange for alternative tradelines or a cosigner.

On that note, why should veterans only consider VA loans, there are other loan options too, right? Yes, there are plenty of mortgage options available irrespective of whether you’re a veteran or not.

But as veterans, you have a slight edge when you go for VA loans. We will see why!

VA home loan first time buyer advantages

As a first time VA home buyer, you have many options to save on the costs that are associated with buying a home. Here are a bunch of benefits you can expect.

1. Zero downpayment

   
   

   Down payments can leave a big gap in your bank account, especially when the housing market prices are high. But, as a VA home loan first time buyer, you can save thousands of dollars by avoiding a down payment.

   
   

   With VA loans, borrowers can get their funds that are worth 100% of their home’s value. This means that you can purchase a home with a $0 downpayment.

   
   

2. Interest rates are lower

   
   

   VA loans have a lower interest rate in the market, compared to FHA and conventional loans. This is mainly because they are guaranteed by the Department of Veterans Affairs and the borrower’s risk involved here is typically lower.

   
   

   Lower interest translates to a lot of savings both monthly and on a long-term basis. They don’t increase your monthly payments as well as the total mortgage amount borrowed.

   
   

3. Avoid mortgage insurance premium

   
   

   Mortgage insurance is paid by the borrowers to minimize the risk faced by the lenders in case there is a loan default. In a way, this is an added cost as with an FHA loan, you will be required to pay both upfront and monthly mortgage insurance.

   
   

   But, with a VA loan, there is no mortgage insurance required. So, VA home loan first time buyers will be paying lower monthly payments and a more affordable mortgage compared to borrowers of FHA or conventional loans.

   
   

4. Lenient credit score check

   
   

   As we discussed the possibilities of a VA loan with a 500 credit score, it became evident that a VA loan has no stricter credit requirements.

   
   

   However, there is no minimum credit requirement set by the Department of Veterans Affairs, lenders can have a minimum down payment set based on their company policies. A minimum of 620 is said to be fairly borrower-friendly.

   
   

5. No loan limits

   
   

   There’s no limit on the amount a VA can borrow. VA mortgages are issued in varied amounts, irrespective of where you live or how the home prices are in the current market.

   
   

   But, the amount that you can borrow will be based on the VA entitlement and your lender’s assessment of your risk. We recommend that you don’t overborrow.

   
   

   Many first time VA home buyers go for mortgage amounts that are not in their affordability range. This will lead to loan defaulting. So, try to get what you can afford.

   
   

In a nutshell, a VA loan has numerous advantages based on the duration of your service. Although it differs from one veteran to another, the above can be a common set of benefits offered to all veterans equally.

Now that you know it’s possible to get a VA loan with a 500 credit score, there are ways to increase your credit score to minimize the processing time and get your VA loan approved quickly. Keep reading to grab your tips below.

Ways to build credit score: First time buyer edition

Building a credit history from scratch is not as easy as it sounds. This is 100% true if you’ve never had any credit cards or a loan before. So here are some of the ways you can improve your credit score:

1. The first step you can do here is to open a credit card account in your name and make a few small purchases.

   
   

2. Once you make these purchases, check your total amount paid via credit card and pay it before the due date.

   
   

3. Avoid maxing out your credit limit. It's crucial not just to stay within the limit but also to avoid using it excessively.

   
   

4. Once you get your credit report, check if there are any errors and dispute them immediately if you find any inaccuracies.

   
   

These are some of the beginner-friendly ways to build your credit score. However, based on your profile, you need not specifically take out a new credit card but you can build your credit by paying off existing debts or making timely payments.

Should you improve your 500 credit score?

You can think of it this way – It’s your choice if you want to improve your credit score or provide proof of documents that support your creditworthiness.

While a 500 credit score may pose challenges, it's not a permanent situation. Your score will improve by implementing proactive measures, such as responsible financial habits, exploring alternative tradelines, and potentially seeking a cosigner for loans.

Ultimately, the choice to improve a 500 credit score rests on a commitment to long-term financial well-being and opens doors to better lending opportunities and financial stability in the future.

Get your pre-approval now.