Is Bankruptcy The End of Your VA Loan Eligibility?

Have you recently filed for bankruptcy? Are you considering it? If you also have plans to purchase a home, there are a few things you should know about how bankruptcy can affect mortgage approval.

There are two common forms of bankruptcy that an individual may file: Chapter 7 and Chapter 13. For each type of bankruptcy, lenders follow their own set of guidelines regarding the length of time you have to wait before purchasing a home.

So what’s the difference between Chapter 7 and Chapter 13 bankruptcy? And how does each affect your mortgage application?

Declaring bankruptcy doesn't keep you from your dream of homeownership permanently, it just requires a short 12 - 24 month waiting period.

Bankruptcy doesn’t mean homeownership is impossible; it often just means you’ll have to wait 12 to 24 months to try.

Chapter 7 Bankruptcy

When someone files for Chapter 7 bankruptcy, they are requesting a complete discharge of their eligible debts. There is not a proposed repayment plan. With Chapter 7 bankruptcy, a trustee is assigned to the case, and a list is created of all of the individual’s eligible creditors. The trustee then sells off all of the debtor’s eligible property to pay back the listed creditors, at least in part.

It’s important to note that there are some types of debt that can’t be discharged through bankruptcy. There are also some types of property owned by the individual that will be exempt from sale.

If you have filed a Chapter 7 bankruptcy, you will likely have a waiting period of 24 months from the date your bankruptcy was discharged before you can obtain mortgage financing.

Chapter 13 Bankruptcy

When someone files for Chapter 13 bankruptcy, they are requesting a consolidation of their debts to repay them with a lower monthly payment over the course of several years. Additionally, Chapter 13 bankruptcy doesn’t require the sale of the individual’s assets to pay off the creditors. The trustee will collect a monthly payment from the debtor and then pay the creditors directly.

If you have filed Chapter 13 bankruptcy, you will likely have a waiting period of 12 months from the date your bankruptcy was filed before you can obtain mortgage financing.

While You Wait

It’s really important to do a few things during that 12- or 24-month waiting period:

  • Make sure you pay each and every bill on time. This shows a lender that you’re committed to ensuring you don’t make the same mistakes again.
  • Take a look at your credit report. If your score is below 620, you will want to start working on repairing your credit.
  • Look at your employment situation and see if there’s room for improvement. Keep in mind the gold standard is to two years in the same job.
  • Don’t pay for a credit repair service. Instead, contact our Lighthouse Program to receive free, personalized assistance and guidance on how to improve your credit. You can reach a Lighthouse credit specialist at 888-392-7421.

Filing for bankruptcy doesn’t mean you can never buy a home again. But it does mean you’ll likely need to wait a while. During this time be proactive and set yourself on a path to repair your credit. Once you have put in the requisite time an effort you will be on the right path to owning your own home.

Photo courtesy PinkMoose