Carlos Scarpero- Dayton and Cincinnati Ohio Mortgage Broker

How To Get A VA Home Loan With Bad Credit

Did you know that over 25% of Americans have bad credit?

Sadly, many of these Americans are veterans and are being needlessly being turned away for VA home financing.

If this is you, you’re in luck because I’m going to show how it is possible to get approved for a VA home loan with poor credit.

The VA loan is extremely flexible, and VA guidelines state that they want as many veterans as possible to get approved.

But, there are a few things you need to keep in mind. The VA does not write the loan. They just write the ground rules and the mortgage insurance. The VA is not a lender.

However, you need to be aware of lender overlays. A lender overlay is where a lender creates a rule on top of what the VA says.

Minimum Credit Score For VA Loans

One of the great advantages of VA loans is the fact that there is no official minimum credit score to get approved for a VA loan.

That doesn’t mean everybody can get a VA loan. It simply means that there is a lot of flexibility in getting approved.

This is where lender overlays come into play.

Some lenders might say, “We have an overlay that we will only approve people at a 580 score.”

Other lenders might say, “We only approve people at a 500 score.” And some might say, “You know what, we look at certain things on credit and decide that way.”

See what you qualify for

Chapter 7 Bankruptcy Rules

VA guidelines state that veterans are typically not to be approved for a VA home loan less than two years after a Chapter 7 bankruptcy discharge. There are a few exceptions at one year but those can be hard to get approved.

Chapter 7 bankruptcy guidelines are addressed in Chapter 4 of the VA Handbook.

“The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself 

disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. 

Consider the reasons for the bankruptcy and the type of bankruptcy filing.


Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law

You may disregard a bankruptcy discharged more than 2 years ago.


If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to 

determine that the applicant or spouse is a satisfactory credit risk unless both of the following 

requirements are met:


• the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and 

has satisfactorily made the payments over a continued period, and

• the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as 

unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the 

circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower 

and/or spouse.


If the bankruptcy was caused by failure of the business of a self-employed

applicant, it may be possible to determine that the applicant is a satisfactory credit risk if

– the applicant obtained a permanent position after the business failed,

– there is no derogatory credit information prior to self-employment,

– there is no derogatory credit information subsequent to the bankruptcy, and

– failure of the business was not due to the applicant’s misconduct.


If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not 

generally be possible to determine that the borrower or

spouse is a satisfactory credit risk.”


Chapter 13 Bankruptcy Rules

On a Chapter 13 bankruptcy, it is a little bit different because the 13 is based on the bankruptcy filing date. If the veteran has made 12 on time payments on the Chapter 13 payment plan, then it is possible to get approved for a VA home loan.

This is also addressed in Chapter 4 of the VA Handbook and a copy of that guidance is below.

“This type of filing indicates an effort to pay creditors. Regular payments are

made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to 

pay off scaled down or entire debts.


If the applicant has finished making all payments satisfactorily, the lender may conclude that the 

applicant has reestablished satisfactory credit.


If the applicant has satisfactorily made at least 12 months worth of the payments and the Trustee 

or the Bankruptcy Judge approves of the new

credit, the lender may give favorable consideration.”


If you have a foreclosure, you will need to wait at least two years after the deed transfer date to be eligible for VA financing.

If the loan that was foreclosed on was a VA loan, you will need to settle that charged off debt with the VA or it will be charged against your available entitlement.

If you are in this situation, please reach out to me because I can help you get the charged off foreclosure settled for pennies on the dollar.

This is addressed in the VA Handbook, Chapter 4  and that guidance is listed below.

“The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or 

spouse’s) credit history does not in itself disqualify the loan.


• Develop complete information on the facts and circumstances of the foreclosure.

• Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge 

provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”


If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the 

new loan. Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to 

meet any secondary marketing requirements of the lender.”

See what you qualify for

Automated Underwriting

There are two different types of underwriting available for VA home loans. There is automated underwriting, and then there is manual underwriting.

Automated underwriting is the preferred method because it’s a simpler process. During automated underwriting, I submit the file to the automated underwriting system or the AUS.

The software gives an “approved eligible” response or a “refer” response. If it is “approved eligible”, then the underwriter simply looks to make sure that the supporting documentation submitted matches what the AUS asked for.

Manual Underwriting

Sometimes the AUS software gives a “refer” response. In those cases, we can use manual underwriting instead. Manual underwriting is where a human underwriter determines if the file meets VA guidelines for approval.

Manual underwriting is really interesting on the VA side because the VA is super flexible with what they allow.

The VA Handbook says “underwriters are encouraged to consider every possible factor in seeking a proper basis for approving loan applications for every qualified veteran, as long as lenders document their reasoning, it is extremely unlikely that VA staff would ever take issue with their decision”.

That being said, lenders don’t want to just randomly say, “Well, this person is approved, this person is not.”

Lender Overlays for Manual Underwriting

Lenders also set their own manual underwriting guidelines to have a fair and consistent policy for everyone.

The VA sets the manual underwriting guidelines intentionally vague and each lender sets their own overlays on manual underwriting. 

For example, even though the VA says that delinquencies that have been added within the past year are allowed on a manual underwrite, I do not know of a single lender that will allow them. 

Additionally, every lender will ask for a letter of explanation detailing why the accounts went delinquent and how that has been resolved. 

Manual Underwriting and Minimum Credit Score

Even though the VA does not have a minimum credit score on a manual underwrite, most lenders will set minimum credit scoring guidelines. I know of a few lenders that will go down to a 500 credit score, but that’s rare. Most set the minimum score for VA manual underwriting at 580 or 600.

This is one of the huge advantages that I have as a full service mortgage broker. I can go through the lender guidelines and play the lenders against each other. This helps us determine which mortgage lender can best suit your needs.

See what you qualify for

VA Manual Underwriting and Debt Ratio

One thing that will get examined very closely on a VA manual underwrite is the debt ratio.

The debt ratio is defined as your debts divided by your income.

For example, if you are making $4000 a month in gross income before taxes, and have $2000 a month in debts, you have a 50% debt ratio.

It is very hard to get a manual underwrite approved with over a 50% debt ratio. I’ve seen one lender that goes to 60%. And even that’s in very special cases only.

VA Manual Underwriting and Residual Income

Another factor that the underwriter will look at pretty closely on any VA loan, but especially on the manual underwrite is residual income.

Residual income is defined as your take-home pay, minus the mortgage payment, including taxes and insurance, minus the HOA dues, minus expected utilities on the new property, minus monthly minimum payments on all other debts, minus anything owed for alimony or child support minus child care expenses.

One thing that’s unique with VA loans is the child care expense requirement. Other loan programs do not factor this expense in for their underwriting.

The reason the residual income requirement is so important is because it’s seeing what you have available to spend for your family. Per the VA Handbook, there are minimum residual income requirements that must be met for VA mortgage approval.

Here is the current 2023 residual income chart.

Residual income, over $80k price

For example, if the loan amount is $80,000 or above and in the Midwest you will need $441 a month in residual income.

If it’s a family of 5 this requirement becomes $1039 a month.

Lenders may have their own overlays regarding residual income and manual underwriting.

For example, I’ve seen some lenders that say that residual income needs to be at least 20 percent above the VA minimum standard to be approved for a manual underwrite.


Those are some basic standards for no credit and bad credit VA loans.

As always, if you have any questions or comments or concerns, please reach out to me by calling 937-572-3713 or by email at

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