Bankrupt and Scared? There’s Hope for VA Borrowers

Bankruptcy is one of the most foreboding words in the world of loans and mortgages.  This problem is a headache that causes apprehension and financial uncertainty for borrowers.  Luckily, bankruptcy isn’t financial doom.

Declaring bankruptcy doesn’t mean you’ll be unable to purchase another home, but it takes hard work to build back credit.  The first step to bouncing back from being bankrupt is understanding one’s credit score.

Bankrupt

A check book is a great way to help track payments. Do whatever works for you!

Credit Score

Credit score reflects your credibility as a borrower.  A recent report from the Consumer Federation of America shows that the majority of consumers don’t have an accurate idea of their credit score.  According to the report, more than one quarter do not know key ways to maintain or raise their score, such as keeping credit card balances low (26 percent) and not applying for several cards at the same time (28 percent).

So, how badly does bankruptcy effect your credit score? Your credit score will drop 130-240 points, depending on the circumstances.

The minimum requirement for a VA loan is a 620 credit score, and in all likelihood this will be a serious blow to your credit score.  Lenders will view you as a greater financial risk and getting a future loan will be difficult.  But there is always hope for your financial future and your dream home.

Bankruptcy and Credit

If you’re going through bankruptcy, you’re not alone. Bankruptcy filings ending March 13, 2013 totaled almost 1.2 million, and while down from previous years, that high tally speaks to the prevalence of bankruptcy.

Most borrowers won’t be considered a “satisfactory credit risk” until two years after their bankruptcy filing.  But the VA has made some exceptions, most notably if:

  • Veterans can prove their bankruptcy was caused by uncontrollable circumstances, such as unemployment, strikes at work, or medical bills not covered by insurance.
  • The veteran or spouse with bankruptcy has purchased goods on credit and showed the ability to make on-time payments.
  • The veteran was self-employed and a business failure caused the bankruptcy, as long as the veteran got a job after the failure; has no other major credit problems; and didn’t cause the failure by illicit acts.

Borrowers who file Chapter 13 bankruptcy protection, a form of bankruptcy protection that seeks to repay a loan rather than erase it, may qualify for a VA loan after 12 months of consistent payments.  Most lenders view debtors who file Chapter 13 protection as a lesser risk than those who file a Chapter 7 (Straight Bankruptcy Liquidation).  However, forgetting payments on a bankruptcy filing will almost eliminate your chances of receiving a loan in the near future.

Building back credit after bankruptcy is difficult, and it requires three major things:

  • Dedication: You have to be committed to changing your credit. It’s not something to be milquetoast about.
  • Lifestyle adjustment: Whether it means no going out to dinner or no new electronics, there’s going to be some sacrifice. Make the best of the adjustment in your finances.
  • Consistency: Making payments on time and proving you’re a diligent borrower is crucial, and reinstating lenders’ trust in your ability to handle debt is the most important part of building credit.

Programs to keep you on track

Never make the mistake of thinking you’re alone in these hard times.  There are many programs available to veterans and active duty personnel that help fix bad credit scores.  One such program is the Lighthouse Program, a free program that helps veterans qualify for a VA loan regardless of credit history.

Photo courtesy of lemonjenny