If you are a disabled veteran that has bad credit, you may think your chances of securing a home loan are minimal. We have good news for you though; you have a very plausible option in the VA home loan. Disabled veterans have the same rights as non-disabled veterans, which means you could be a good candidate for the VA home loan.
Your Disability Rating
If you were disabled during your service in the military or you are disabled because of your service, the VA probably issued you a disability rating. This rating affects your disability pay and does not take away from your ability to secure a VA loan.
Your disability rating can actually help your situation. First, the disability income you receive from the VA is an allowed type of income for the VA loan. Second, the disability rating can make you exempt from paying the VA funding fee. This could save you several thousand dollars, since the VA funding fee is 2.15% of your loan amount. If you borrow $200,000, you’d save $4,300.
Eligibility for the VA Loan as a Disabled Veteran
So how do disabled veterans prove their eligibility for the VA loan? You do so in the same manner that any other veteran shows entitlement for the loan.
You earn entitlement for a VA loan by serving adequate time in the military. This means serving:
- At least 181 days during peacetime
- At least 90 days during wartime
No matter when you served or what branch of the military you served, you must also have an honorable discharge in order to be eligible for the loan.
If you earn entitlement, you’ll have enough entitlement to purchase a home up to $484,350 with no down payment. You don’t have to use all of the entitlement at once. After you use your entitlement, though, it remains tied up in the home you used it to purchase until you sell the home and pay the loan off in full.
Qualifying for the VA Loan as a Disabled Veteran
Disabled veterans also qualify for the VA loan the same way that non-disabled veterans qualify. Even if you have bad credit, you may qualify, you just need the following:
- 620 credit score – This requirement may vary by lender. The VA doesn’t have a minimum credit score requirement. Typically, lenders want at least a 620 credit score, but you may find lenders that allow a lower score if you have other compensating factors.
- Max 41% debt ratio – The VA doesn’t require a specific housing ratio like FHA, USDA, and conventional loans require. Instead, they focus on the total debt ratio. Your total debts, which include your new mortgage plus your existing monthly debts, shouldn’t exceed 41% of your gross monthly income (your disability income).
- Enough disposable income – The VA does put a lot of emphasis on your disposable income. This is the money you have left each month after you pay your bills. They require a specific amount based on the cost of living in your area and your family size. You must meet the requirements for your situation in order to qualify for the loan.
- Stable income – Even if you don’t work and only rely on your disability income, you must prove that it’s consistent and reliable. In other words, lenders need to know that you will receive your income monthly as well as on an ongoing basis for at least three years.
Compensating Factors for Bad Credit
If you have bad credit or even have a debt ratio that exceeds 41%, you’ll need compensating factors to make up for these risks. Lenders and the VA need to know that you can afford the loan beyond a reasonable doubt. So what are compensating factors? While they could vary by lender, the most common include:
- Assets on hand – Lenders like to see that you have reserves, or money set aside to cover the cost of your mortgage if you can’t pay it. Lenders measure your reserves by determining how many months of mortgage payments it will cover. For example, $10,000 covers 10 months of a $1,000 mortgage payment.
- Stable employment – Disabled veterans receiving disability pay can still work, especially if they only receive a small amount of disability pay. If you have been at the same job for many years, it shows the lender consistency and reliability, which can work in your favor when securing a loan with bad credit.
- Low debt ratio – Even though the VA allows a debt ratio of 41%, they look favorably on borrowers that have a lower DTI. If you can pay your debts down or off before you apply for the VA loan, you put yourself in a better position for approval.
Receiving Your Disability Rating After Closing on the Loan
In some cases, borrowers receive their disability rating from the VA after they close on their VA loan. Assuming that you can qualify for the loan with your other income, the delayed disability rating can work in your favor. As long as the rating is retro-dated to a date before your loan closing, the VA will refund you the amount of the funding fee that you paid.
The VA will refund you the money based on the way that you paid it. If you paid cash at the closing, the VA will send you a refund check. If you wrapped the fee into your loan amount, the lender will apply the refund to the principal balance of your mortgage, paying your balance down accordingly.
Don’t let the fact that you are a disabled veteran with bad credit keep you from applying for a VA loan. The VA loan program is one of the most flexible programs available on the market today. Because each lender can have their own requirements, make sure that you shop around to find the lender with the most flexible guidelines as well as the best closing costs and interest rates.