Bankruptcy and foreclosure can take a toll on your financial profile. These are difficult events that leave veterans and military families reeling, often due to circumstances beyond their control.
But neither has to keep you from using your hard-earned VA home loan benefits.
To be sure, a bankruptcy or foreclosure complicates the picture. They can damage your credit score and delay your homebuying time line. But prospective borrowers who focus on repairing their credit can still look to tap into this historic no-down payment program.
Bankruptcy & VA Loans
The two common forms of consumer bankruptcy are Chapter 7 and Chapter 13.
Chapter 7 bankruptcy involves the liquidation of assets to repay debt. Consumers can also erase unsecured debts like credit cards and medical bills. This is typically a path for people with lower to middle incomes and minimal assets.
Chapter 13 bankruptcy focuses on repayment of debt. Consumers propose a repayment plan that’s typically completed in three to five years. You’ll generally need a steady income and a desire to make up missed payments on things like a mortgage or car loan.
Consumers who file for bankruptcy protection can see their credit score drop anywhere from 130 to 240 points, according to credit scoring firm FICO. VA lenders are typically looking for a credit score of at least 620, and that kind of decrease knocks many borrowers out of qualifying range.
In addition, lenders will often require a “seasoning period” following a bankruptcy filing or discharge. Generally, prospective homebuyers with a bankruptcy will need to wait two years from the date a Chapter 7 bankruptcy is discharged or one year from the date a Chapter 13 bankruptcy is filed.
Foreclosure & VA Loans
There are several different types of foreclosure — a standard foreclosure, a deed-in-lieu of foreclosure and a short sale. They’re all bad news for homeowners.
A standard foreclosure involves the bank taking back the house through formal foreclosure proceedings. A deed-in-lieu allows the homeowner to give back the house without the foreclosure formalities. With a short sale, the lender allows the homeowner to sell the home for less than they owe on the mortgage.
Lenders and the credit bureaus typically view these as the same general outcome. A foreclosure can knock anywhere from 85 to 160 points from your credit score. VA lenders will also typically require a two-year seasoning period following a foreclosure.
Homeowners who lose an FHA loan to foreclosure may need to wait three years before securing a VA home loan.
Many veterans are under the impression that having a VA loan foreclosed on means they’ve automatically lost access to their benefits. That’s simply not the case. VA borrowers may be able to obtain another VA loan despite a default.
Foreclosure Following a Bankruptcy
It’s not uncommon for homeowners to experience foreclosure in the wake of a bankruptcy, sometimes years down the road. The worry for prospective homebuyers is getting hit with another two-year seasoning period because of a later foreclosure.
Lenders may have different polices for handling cases like this. It’s often a question of when the borrower ceases to be legally responsible for the debt. If that’s with the bankruptcy discharge, then a foreclosure months or years later won’t typically kick off another two-year waiting period.
Getting your credit back in shape will be key following a bankruptcy or foreclosure. Veterans and service members can contact the Lighthouse Program at Veterans United for help.
Lighthouse credit consultants work with veterans and service members for free to craft a plan to improve their credit scores. The Lighthouse Program provides veterans with free tools and information to help them boost their credit profile and get on the road to loan prequalification.
This free, no-obligation program has helped more than 2,000 veterans and military families improve their financial and credit profiles and purchase their dream homes. You can reach a Lighthouse Program specialist at 800-698-5158.
Chris Birk is executive editor of Veterans United Home Loans and author of The Book on VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits. Nearly 330,000 people follow his VA Loans community on Facebook. You can also follow him on Google+.