VA Loans When Your Spouse Has Bad Credit

Married couples often pursue a VA home loan together, with each of them on the mortgage note. There are a host of reasons why, but one of the simplest is that a Veteran may not have enough income to purchase the home of their dreams on his or her own. Making sure you can afford the home you are purchasing is a crucial first step, but adding your spouse can open up some additional opportunities.

While counting your spouse’s income is a big benefit, there’s also a potential downside to having a co-borrower on your VA mortgage. VA lenders will consider your spouse's credit and debts, just like they will yours.

Working on Your Credit Score

Improving your credit score is your best chance at securing a VA loan, but how do you do that? A few basic steps you can take to improve your credit score include making your payments on time, catching up on past-due bills, lowering your credit utilization and disputing any errors you see on your report.

1. On-time Payments

The most important part of your credit score is your payment history. Lenders want to see that you’re fulfilling your present debt obligations before extending any further credit. If you or your spouse have any bills that are currently past-due, catching them up will be your number one priority when it comes to raising scores.

2. Credit Utilization

While carrying small balances on your credit cards can help increase scores, maxing out those cards is seen as a negative by the credit bureaus. Ideally, you want to keep the balances on your credit cards under 30% of the limits all month long. The lower your total credit utilization, the higher that part of your credit score will be.

If you or your spouse don’t have a credit card yet, getting a small, secured card from a bank that reports to all three credit bureaus can be one of the best ways to immediately boost scores. Without an open credit account, you’re missing one of the biggest factors on how your overall credit score is calculated.

3. Dispute Errors

Companies frequently make mistakes when reporting information to the credit bureaus. If you aren’t already using a credit monitoring service, you can receive a free copy of your credit report from all three bureaus once every 12 months through AnnualCreditReport.com. You’ll want to review the information on your report and confirm that everything is accurate.

If you see any accounts you don’t recognize or information you believe is incorrect, you can call the companies directly using the contact numbers listed in the report. This is typically going to be more effective than disputing through the credit bureaus, who are simply reporting what’s being sent to them. Helping the company understand where they made the error will help get the inaccurate information removed from your report as quickly as possible.

Community Property States

While not including your spouse on the mortgage is an easy choice for some, others may not have that option. This is because of community property states.

In community property states, lenders can take your spouse’s debts into consideration regardless of whether or not they are on the loan. If you are in one of the following states, your spouse’s debt will likely impact the amount you can qualify for a VA loan:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

When factoring in your spouse’s debts to purchase a home in a community property state, it’s generally recommended to keep your debt-to-income ratio (DTI) below 41%.

Explore Other Mortgage Types

If buying a home is an immediate need and you can’t wait until your credit score improves, it could be time to explore different mortgage types with lower minimum credit score requirements. For example, some FHA loan lenders will be willing to approve loans with credit scores as low as 580. This requirement varies by lender, but reconsidering the FHA vs VA loan could open some doors for you and your spouse.

It is important to note, however, that FHA loans do not come with the same $0 down benefit that VA loans do. But, if you’ve got some room for improvement with your credit scores, the 3.5% down payment of FHA loans might provide another pathway toward homeownership.