Learn how a Chapter 7 or Chapter 13 bankruptcy can affect you ability to get a VA home loan, or how low late payments affect your loan and the possibility of foreclosure if your mortgage goes unpaid.
Past bankruptcy or foreclosure can do severe damage to your credit profile.
According to FICO, bankruptcy may result in a 240 point drop in your credit score, while a past foreclosure can cause up to a 160 point hit. However, those interested in a VA loan should know that significant credit setbacks like this do not automatically disqualify you from using a VA loan.
Credit history is undoubtedly a significant consideration for VA loan eligibility. However, borrowers with low credit scores, poor credit history, and even bankruptcy can still gain approval for a VA loan.
The VA loan qualification guidelines for individuals with a prior bankruptcy vary depending on the type of bankruptcy.
With Chapter 7, the VA requires that an individual wait no less than two years from the bankruptcy discharge date before qualifying for loan approval. Additionally, the individual must provide a full explanation of the Chapter 7 bankruptcy and have re-established good credit. Proof of job stability will also be necessary for approval.
With Chapter 13 bankruptcy, the guidelines vary slightly. An individual may still receive approval for a VA loan even while still paying on their Chapter 13 bankruptcy.
The borrower must have made their payments on time for at least one year. To verify this, the court trustee must give written approval before the loan can be approved.
Like Chapter 7 bankruptcy, a full explanation of default is required in addition to re-establishing good credit and proving job stability.
Potential homebuyers still amidst that one to two-year time-frame should prepare themselves by staying current on all bills; any late payments could derail progress.
There are several types of foreclosure scenarios. Luckily for homebuyers with a past foreclosure, lenders typically view the different kinds all the same.
For borrowers interested in getting a VA loan after a foreclosure, they'll typically have to wait out a two-year seasoning period following the foreclosure. In certain instances, such as losing an FHA loan to foreclosure, borrowers may have to wait three years.
Credit takes a significant hit if one of these unfortunate life events happens. Reviewing your credit report frequently, setting budgeting goals, and checking for inaccuracies, then disputing when necessary, is time well spent.
Although bankruptcy and foreclosure can feel devastating, it doesn't have to derail your dreams of homeownership. If you are committed to rebuilding your credit profile and meeting financial obligations, the VA Home Loan may be the home financing vehicle for you.