Bankruptcy, Foreclosure and VA Lending
Bankruptcies and foreclosures are usually the very last stop on a difficult road. Borrowers certainly don’t enter any long term mortgage agreement with the full intent of defaulting on the loan and lenders wouldn’t issue any mortgage if it was clear the borrowers had no desire to keep the house.
It doesn’t make sense. No, such financial disasters are typically the result of things that happened way beyond the borrower’s control. A loss of a job, an extended illness or even a death in the family can portend a disaster.
But it’s not the end of the world. And if you’ve had a bankruptcy or foreclosure, you don’ have to wait seven or 10 years before you’re eligible for a VA loan.
There are two types of bankruptcies, a Chapter 7 and a 13. A Chapter 7 is a complete release of all dischargeable debt while a Chapter 13 is a repayment plan approved by a court and monitored by an appointed trustee. Most VA lenders ask for at least two years to pass since the Chapter 7 discharge and two years since the filing of the Chapter 13. The very important caveat here however is making sure there are no more payments to creditors or a landlord that are more than 30 days past the due date. Any late payments would automatically cause most VA lenders to decline the loan at the outset.
With a foreclosure, VA lenders also want to see a two year period to go by while credit has been repaired and there are no more late payments. You may wonder how someone can reestablish credit so soon after either event and why companies would extend credit to someone with a recent bankruptcy. The fact is there are companies who specialize in helping people repair their credit with such things as a secured credit card, timely rent and utility payments.
If the foreclosure involved a previous VA loan, there is still a method to obtain a VA mortgage if the veteran has any remaining entitlement. If so, the VA lender can recalculate a “second tier” amount that just might fit your scenario. There are those who might still be a bit shy to apply for a mortgage so soon after a bankruptcy or foreclosure and that’s understandable. However, for those who are ready to get back on their feet and once again buy a home, there’s no need to wait seven or 10 years, you can heal you credit much sooner than that.