Your VA disability rating by itself has no negative effect on VA loan eligibility. In fact, your rating may provide cost-saving benefits and additional income when considering a VA loan, even if you have bad credit.
Every month or two, I'll come across this question or a slight variation of it: "Can I qualify for a VA loan as a disabled veteran with bad credit?”
It's a trickier question than it might first appear and we can break it down into two parts. One, does a disabled veteran qualify for a VA loan? And two, can you qualify with bad credit?
Military borrowers have multiple requirements to hit in order to fully qualify for a VA home loan, from meeting the service standards and a lender's credit score minimum to residual income and acceptable debt-to-income ratio.
But in some respects, the general answer couldn't be clearer – disabled veterans who have VA loan entitlement are absolutely eligible for a VA loan.
Nothing about your disability rating by itself is going to negatively affect your chances. In fact, VA lenders can count disability income as effective income toward a mortgage, and borrowers with a service-connected disability are exempt from paying the VA Funding Fee, a mandatory cost the VA applies to every purchase and refinance loan to help cover losses and ensure the program's continued success.
Two additional VA loan benefits for disabled veterans, no matter if they are 10 percent or 100 percent disabled, are the VA Funding Fee exemption and ability to count disability income, which we'll dive into below.
Veterans receiving compensation for a service-connected disability are exempt from paying the VA Funding Fee, which is otherwise applied to all purchase and refinance loans.
Being exempt from paying the funding fee is a big benefit. This fee is a percentage of the loan, and it goes straight to the VA.
For many first-time buyers the fee is 2.30 percent, which on a $150,000 loan is $3,450. Borrowers without an exemption can ask the seller to pay this or pay it themselves, either upfront or over time by rolling it into the mortgage.
It’s not uncommon for VA borrowers to be waiting on a disability rating determination during the purchase process.
Lenders will need to obtain and remit the fee to the VA unless there’s clear documentation showing the borrower is exempt. But veterans who receive a disability rating after their loan closing may be able to obtain a refund of their VA Funding Fee.
Like any other prospective borrower, disabled veterans who are eligible for a VA home loan don't get one automatically. They'll still need to meet a VA-approved lender's credit and underwriting requirements. Generally, VA lenders are looking for a least a 620 credit score to move forward. Stable, reliable income that's likely to continue is critical. So is having a healthy balance between debt and income.
Disabled veterans may also be able to tap into the VA's Specially Adapted Housing (SAH) grant program. This helps veterans adapt or retrofit properties to meet their unique needs. Grants can run up to $5,000 and even $10,000 in some cases. Every borrower's situation is different, so it's best to contact the VA directly to determine whether you're eligible to utilize the SAH program.
Military veterans can qualify for over $3,000 in benefits from the VA. Learn more: Military Disability Compensation Rate Tables.
Homeowners pay property taxes each year, typically as part of their monthly mortgage payment.
Borrowers who receive disability income may also be eligible for property tax exemptions. These exemptions can vary by state and other factors.
At Veterans United, it may be possible for borrowers to qualify for a loan with tax-exempt amounts and have escrows set up to reflect the exemption. Talk with a Veterans United loan specialist at 855-259-6455 for more details.
In some cases, the VA may determine that veterans are unable to manage their own hard-earned VA benefits because of health-related issues.
When this happens, the VA will appoint a fiduciary to receive the disability compensation and help the veteran best utilize it.
Veterans in these situations may be able to move forward with a VA loan. But these files require formal approval from the VA in order to close.
VA officials want to make sure the new loan is in the best interests of the veteran. Review times can vary for these, but they can take up to a month or more in some cases.
To answer the second part of the question, getting a VA loan with bad credit really depends on your definition of “bad credit.”
The VA doesn’t set a minimum credit score requirement, but most lenders will want to see a 620 mortgage credit score to secure financing.
However, if you’re below a 620, that doesn’t immediately count you out. Veterans United offers free credit consulting services for those wishing to qualify for a VA loan.
See what’s possible with a VA loan. Talk to a Veterans United loan specialist at 855-870-8845 or get started online today.