Qualifying for a VA loan after bankruptcy is certainly possible, often in a shorter period than you would with a conventional loan.
With a Chapter 7 bankruptcy, lenders typically wait two years after the date of discharge. As for Chapter 13 bankruptcy, you may be eligible for a VA loan just 12 months removed from the filing date.
Make no mistake, a VA loan after bankruptcy is not a quick or easy road. A bankruptcy can cause your credit score to drop anywhere from 130 to 240 points, according to credit scoring firm FICO. It can take from three to 10 years for a consumer’s credit score to fully recover and you may need to spend a good chunk of that time working to rebuild your credit.
The good news for VA borrowers is that the credit score hurdle is typically lower than what you’ll need for conventional or even FHA financing.
Lenders will usually have a “seasoning period” for borrowers who have experienced a bankruptcy. This is basically how much time you have to wait before being able to close on a home loan.
The seasoning period can vary depending on a host of factors, but a big one is the type of bankruptcy you experienced.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy is known as a “liquidation” bankruptcy and forces an individual to sell certain assets in order to repay creditors.
You will typically need to wait at least two years from the date of a Chapter 7 discharge to qualify for VA loan approval.
By comparison, borrowers will often need to wait four years to pursue conventional financing in the wake of a Chapter 7 bankruptcy discharge
Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is known as a “reorganization bankruptcy” and creates a court-supervised plan for debt repayment.
You may be eligible for a VA loan once you’re 12 months removed from filing for Chapter 13 bankruptcy protection. Prospective borrowers will usually need approval from their Chapter 13 bankruptcy trustee to take on new debt, such as a mortgage.
For perspective, veterans seeking a conventional loan will usually need to wait two years following a Chapter 13 discharge.
Just to reiterate, the seasoning period for VA loans is based on your Chapter 13 filing date, not the discharge date. That’s a big -- and beneficial -- difference.
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Bankruptcy with a Mortgage
Homeowners who go through a bankruptcy may want to try and keep their home through a process known as “reaffirmation.”
Doing this means you will continue to be responsible for your mortgage payment. Talk with an attorney about reaffirmation and its implications for your financial situation before making a final decision.
With a Chapter 7 bankruptcy, homeowners who do not reaffirm will see their legal and financial responsibility for the mortgage end with the discharge. But there’s still a lien on the property, and it can take months or years for lenders to foreclose. It’s possible for some prospective borrowers to continue living in the home after the bankruptcy discharge.
In cases like these, some lenders may require a Verification of Rent (VOR) to verify borrowers have continued to make timely mortgage payments. Guidelines and policies on this can vary by lender.
Bankruptcy Followed By 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 typically 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. That’s not necessarily the case.
These situations are always viewed on a case-by-case basis. You can view some common scenarios here.
Chapter 13 Homeowners
For Chapter 13 homeowners, the bankruptcy can’t fully discharge mortgage debt. Lenders will want to know more about your mortgage payment history over the previous 12 months.
Homeowners who stop making mortgage payments or walk away from the home will likely struggle to secure financing and often wind up in foreclosure, which following a Chapter 13 bankruptcy would typically trigger its own two-year seasoning period.
At Veterans United, if you’re a Chapter 13 borrower and you’re basically giving the home back to the bank in exchange for the outstanding mortgage debt, you’ll still need to wait two years before being able to close on a VA loan.
But in these situations we can start that clock when your bankruptcy plan is confirmed rather than having to wait for the eventual foreclosure date.
Every bankruptcy situation is different. Talk with a Veterans United loan specialist at 855-259-6455 about your unique scenario and what might be possible.
Get started online today, and see how Veterans United can help you move closer to prequalifying for a home loan.