We recently took a look at how foreclosure can affect your ability to obtain a VA home loan. This time let’s focus on bankruptcy. For most prospective VA borrowers, it’s pretty much the same (good) news: Experiencing a bankruptcy doesn’t mean you’re automatically out of the running for another VA-backed mortgage down the road.
Bankruptcy filings in federal court dropped nearly 13 percent in the 2014 calendar year. But consumers still reeling from the economic collapse continue to seek shelter using either a Chapter 7 or Chapter 13 protection (you can learn more about the difference between the two here and here). These tools can help veterans in financial distress get their overall fiscal health back on track. But they do come with some negative consequences, which generally includes a sizable hit to your credit score.
With a Chapter 7 bankruptcy, VA-approved lenders will typically wait until you’re at least two years beyond the date of discharge. That time frame is important to remember — the clock starts with the discharge, not with the initial bankruptcy filing.
Some veterans who file for Chapter 13 bankruptcy protection may be eligible for a VA loan just 12 months removed from their filing date. Satisfactory credit and no late payments during that time will be critical factors. You would also need to obtain permission from the bankruptcy trustee to take on those new monthly payments.
Losing a Home to Bankruptcy, Foreclosure
Depending on your particular financial situation, existing homeowners may essentially give back their home during the bankruptcy process. Others may lose theirs to foreclosure months or even years after the fact. Since foreclosure also requires prospective VA borrowers to wait at least two years before obtaining a home loan, a common concern is that veterans will have to wait four years or more to move forward.
It’s common to have a short sale or foreclosure after a bankruptcy discharges. Trying to determine the status of a mortgage and whether it was discharged in a bankruptcy can be one of the more complicated scenarios mortgage lenders face. Policies may vary on this, so it’s important to check with a loan specialist.
At Veterans United, for example, we generally need to wait 24 months from the day the veteran ceased to be legally responsible for the defaulted mortgage debt (assuming it was a VA loan). As long as that debt is truly discharged with the bankruptcy, a foreclosure that follows in the wake wouldn’t “restart” your two-year waiting period. In other words, there’s no double-whammy with a foreclosure that happens months or years down the road.
Boosting Your Credit
One of the biggest obstacles to getting a VA loan after bankruptcy is a consumer’s credit score. Spending those two years after the discharge working on credit repair is critical, as is making on-time payments.
If you need some direction about boosting your credit, check out the Lighthouse Program at Veterans United. They work with veterans and active military for free to create a plan to repair your credit and get on the path to loan prequalification.
You can talk to a Lighthouse credit specialist at 888-392-7421.
Photo courtesy Dougtone