Getting a VA Loan After Bankruptcy

A VA loan after bankruptcy is not a short or easy road. According to credit scoring firm FICO, a bankruptcy can cause your credit score to drop anywhere from 130 to 240 points. It can take 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 bankruptcy. A seasoning period is how much time you have to wait before being eligible to close on a home loan.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is known as a "liquidation" bankruptcy and forces an individual to sell certain assets to repay creditors.

VA home loan approval after a Chapter 7 discharge will typically take two years.

By comparison, borrowers will often need to wait four years to pursue conventional financing in the wake of a Chapter 7 bankruptcy discharge.

Chapter 7 Bankruptcy Reaffirmation Agreement

Homeowners who go through bankruptcy may want to try and keep their homes through a process known as "reaffirmation."

A reaffirmation of debt after Chapter 7 bankruptcy means you will continue to be legally 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. Some prospective borrowers can 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.

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.

A prospective borrower may receive approval for a VA home loan while still making payments on their Chapter 13 bankruptcy if they have made their payments on time for at least one year. They will usually need consent 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.

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.

Bankruptcy Followed By Foreclosure

Bankruptcy and foreclosure sometimes go hand-in-hand. While going through foreclosure with a VA loan is difficult, it’s not the end of your VA loan eligibility.

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. Following a Chapter 13 bankruptcy would typically trigger its two-year seasoning period.

At Veterans United, if you're a Chapter 13 borrower and you're 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 waiting 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.