Getting a VA loan after filing bankruptcy or going through foreclosure is something most people don’t anticipate happening to them. Either situation can make things more difficult for potential borrowers financially moving forward. Your credit score takes a hit and if you do obtain credit again, interest rates could be high making monthly payments even more expensive. Now is the time to evaluate options on how to obtain a VA loan with a foreclosure or bankruptcy. You may still qualify for options that include no-money down depending on your past credit history and current ability to repay.
Applying for VA Loan with Bankruptcy History
There are two common forms of bankruptcy filed by consumers including Chapter 7 and Chapter 13. Chapter 7 bankruptcy eliminates or discharges qualifying debt obligations. In most cases these debts include credit card bills, medical bills and personal loans. Chapter 13 bankruptcy is a repayment plan. This structures outstanding debts often not eligible for discharge or elimination in Chapter 7, into an affordable repayment plan. The plan can last for several years but certain debts at the end of the plan can be forgiven.
Chapter 7 bankruptcy is filed when a person (known as the debtor) is unable to repay outstanding debt. This chapter helps liquidate assets to pay toward debt obligations. Chapter 13 bankruptcy can help debtors can their home and vehicle with a restructured payment plan. You need to show you are eligible to make regular payments. This chapter can help avoid foreclosure or repossession with changes made to loan terms.
Bankruptcy can cause your credit score to drop by roughly 100 to 200 points or more according to FICO, a credit scoring firm. Check with VA lenders to learn what credit score they look for when approving VA loans.
Sometimes you may be required to wait a certain period of time before applying. This is also known as a “seasoning period.” During this time you show you are able to make regular payments. They should be reported on your credit score by the creditor.
On average, an applicant seeking to obtain a VA loan may need to wait about 2 years before applying if they filed Chapter 7 bankruptcy, but lenders vary and some may lend credit sooner. If you filed Chapter 13 bankruptcy you may be qualify after 1 year and get discharged.
Applying for VA Loan with Foreclosure History
Any homeowner does not want to deal with a foreclosure. There are different types of foreclosure including short sale, standard foreclosure and a deed-in-lieu of foreclosure. In a short sale the home is sold for an amount less that the mortgage amount. A standard foreclosure involves action from the bank or lender in which they take back the property. Formalities usually involved in foreclosure are avoided during a deed-in-lieu of foreclosure.
Even though there are different types of foreclosure the action itself is viewed generally the same way by credit bureaus and lenders. Your credit score could be reduced by in between 80 and 160 points. If you are interested in applying for a VA loan you may have to wait about two years after foreclosure occurred. If your home loan was through FHA a three year waiting period applies. VA loans can be applied for and even approved if you gone through foreclosure. This is the case even though many veterans believe they may not qualify due to being foreclosed in the past.
What If You Foreclosed and Went Bankrupt?
You may still be able to apply for a VA loan but things may be different in this type of situation. It is common for people to file bankruptcy and deal with foreclosure in the process, or vice versa. The waiting or seasoning period may be about 2 years. There are lenders with unique policies for situations of this nature. Keep in mind you should be able to prove you can make payments on your mortgage upon applying. Take your time searching for lenders that work with borrowers with this type of history. The timing of each event may also affect your ability to apply. If you file bankruptcy but a few years later went through foreclosure your wait period could still be 2 years or less.
Checking Your Credit
One important element to review before applying is your credit report. It is a good idea to check activity after going through a bankruptcy or foreclosure. Check to make sure information is correct. If you have started making payments on a new line of credit review this information as well. You should check to make sure payments are being reported and any corrections you’ve requested have been done. It may take time to get errors corrected and shown properly on the report. Checking your credit score is an action to consider when you want to prequalify for a VA loan.
Ask Questions about Your Financial History
When you are ready to apply for a VA loan you should get as much information as possible to make a good decision about your situation. In the case of bankruptcy and/or foreclosure personal situations vary. For instance, you got a divorce and your spouse got to keep the house but defaulted on loan payments. Next thing you know the house was foreclosed. You ended up taking a hit because the ex-spouse didn’t make payments. This could have happened years ago but it is possible it could affect how you apply for a VA loan.
When you review your situation ask questions about the approval process. Discuss your situation with a VA lender or loan servicer qualified to provide clear insight. You may not be able to get approval for the amount you want, but you could qualify for entitlements to reduce amount you repay if you default. You should discuss concerns especially if you are under the impression you may not qualify due to your financial history. The VA offers additional resources to help you get answers you need.
Planning Ahead Just in Case
Before getting approved for a VA loan you should review options available in case you find yourself unable to make payments. Keep up to date on options for veterans to help pay mortgage payments. You could look into refinance options or ways to pay off what you owe to the VA. You can learn options to help reduce interest rates and monthly mortgage payments. The following details provide a basic overview of your options.
• An IRRRL or Interest Rate Reduction Refinance Loan is a VA loan option that keeps interest rates low. It is guaranteed by the federal government that gives borrowers a lower interest payment and principal amount. This loan is available to those with an existing qualifying VA loan.
• Loan entitlements may help you if you default on a loan. This is the amount the federal government will pay based on the amount of the loan. If you choose to participate in a plan such as the one previously mentioned your entitlements may stay the same.
• IRRRL may qualify for properties considered underwater. This situation includes making mortgage payments on property that is worth less than the original loan amount or worth less than its value. You may not need to be an occupant in the home at the time you apply for the loan. In some cases you may increase chances of getting approved if you are a resident living on the property.
• IRRRL requires a funding fee which is roughly 0.5%. This applies to VA Home Loan Guaranty benefit. There are exceptions to this fee. You don’t have to pay if you are receiving compensation related to a disability, you are anticipating compensation related to an injury if no active duty pay or retirement was received, and/or you are a spouse of a service member who became deceased while on duty.
• Refunding can help veterans by funding the loan. This is an option to consider if foreclosure is imminent. The VA becomes the loan servicer after purchasing the loan from the original lender. This is a rare option that can help if you have no other options. Sometimes borrowers are in a situation in which the lender does not offer other payment options such as loan modification, forbearance or a repayment plan. Even if you can make mortgage payments each month the lender could refuse these options.
• Another help option for veterans with VA loans includes contacting the VA Regional Loan Center. There are different locations near you and you can discuss your situation over the phone with a specialist. This service helps obtain details through an intervention between your loan servicer and a specialist who works with you. As a detailed process your situation is reviewed to see what options can take place to avoid foreclosure. The Department of Veteran affairs can help you if you are a veteran with a loan that is not guaranteed by the VA. You can also contact the Regional Loan Center to discuss possible options with a specialist.