How To Get A VA Loan After Bankruptcy: Qualifying For A VA Mortgage

Qualify For A VA Home Loan Program After Bankruptcy

Recovering your finances after a bankruptcy can be challenging. Although you may have escaped crippling debt payments, your financial history will still be a problem if you need to purchase a home with a loan.

However, if you have served in the military, the VA loan program could give you an advantage when rebuilding your finances. The U.S. Department of Veterans Affairs can offer favorable terms if you have gone through bankruptcy.

Eligibility for a VA Loan After Bankruptcy

Whether you have gone through a Chapter 7 or Chapter 13 bankruptcy, it will have negatively affected your credit score. Depending on your specific circumstances, your credit score could have dropped hundreds of points.

With a much lower credit score, qualifying for a mortgage of any type will be more difficult. Lenders don’t want to do business with high-risk borrowers, and this is why there are minimum waiting periods after bankruptcy before you can apply for a mortgage. 

What is the Bankruptcy Waiting Period for a VA Loan?

After going through bankruptcy proceedings, you may need to delay your application for a new mortgage, depending on the type of bankruptcy. With conventional loans, you might need to wait up to four years before being eligible for a home loan.

With a VA loan, the lender must ensure that you are a satisfactory credit risk before approving your mortgage. This generally isn’t possible within 12 months of the bankruptcy being discharged. For a Chapter 7 bankruptcy, borrowers must wait two years, unless the bankruptcy was considered beyond their control and they have subsequently obtained credit and are making consistent payments.

After a Chapter 13 bankruptcy, the lender may consider the borrower to have satisfactory credit after they have made all their debt payments. But after 12 months of payments, a bankruptcy judge or the trustee can approve new credit. This may allow the borrower to be approved for a VA loan, depending on their circumstances.

Comparing Bankruptcy Waiting Periods

The waiting times for a VA loan are shorter than some other types of mortgages. The waiting period for Chapter 13 begins when the bankruptcy is filed, and when discharged for Chapter 7.

• VA Loans: Chapter 7, two years; Chapter 13, one year
• FHA Loans: Chapter 7, two years; Chapter 13, one year
• USDA loans: Chapter 7, three years; Chapter 13, one year
• Conventional loans: Chapter 7, four years; Chapter 13, between two and four years

VA Loans and Chapter 7 Bankruptcies

A Chapter 7 bankruptcy lets the debtor sell their assets to pay down their debt. Sometimes known as a liquidation bankruptcy, this process allows non-exempt assets to be liquidated to pay unsecured debts. 

Once the court-appointed trustee has sold non-exempt assets, the money is used to pay creditors. If there are remaining debts, these will usually be discharged, so you can start again debt-free. However, some types of debt won’t be discharged; this includes recent taxes, court fines, and child support.

After the remaining debts have been discharged, a two-year waiting period will begin before you can be approved for a VA loan in most cases.

Qualifying for a Veterans Loan After Chapter 7 Bankruptcy

Along with meeting the usual VA loan eligibility requirements, there are a few extra requirements after Chapter 7: 

• A credit score of at least 620, depending on lender requirements
• No recent history of late payments or new credit accounts
• 2 years should have passed since the discharge date

Chapter 7 Reaffirmation Agreements

If you are going through a Chapter 7 bankruptcy but want to keep a specific debt, you can do so with a reaffirmation agreement. This means you are still responsible for paying that debt, but it lets you hold on to property that is important to you.

A reaffirmation agreement tells the court you want to keep the item and continue paying the debt. However, if you cannot prove you can afford this debt, the court may reject your agreement.

A Chapter 7 bankruptcy wipes away everything you owe on your home, but it can leave a lien on the property, allowing the lender to foreclose. If you sign a Chapter 7 bankruptcy reaffirmation agreement before discharge, you could hold onto the property.

Even after the bankruptcy discharge, you may still be able to live in the home. Lenders can take many months to foreclose a property, but they will want to recoup the money they have lost because of your bankruptcy.

Should You Reaffirm a Mortgage?

If you want to keep the home or other items that might otherwise be liquidated during a Chapter 7 bankruptcy, reaffirmation could be an option. It might be a good idea if:

• You want to keep the home or other possessions
• You know that you can afford the repayments
• There are no other options available to avoid it being sold

When a Chapter 7 bankruptcy reaffirmation agreement isn’t a good idea:

• You aren’t sure you can keep up with the debt repayment plan
• You owe more on the loan than the debt is worth
• You are struggling financially

A reaffirmation agreement needs to be filed with the bankruptcy court. It should state the original terms of the loan, any changes like lower interest rates, and evidence to show that you can afford the repayments.

Chapter 13 Bankruptcies and a VA Loan

A Chapter 13 bankruptcy, sometimes known as a reorganization bankruptcy, allows individuals to keep their property by setting up a payment plan for the debt. This usually means repaying the debt over three to five years, supervised by the bankruptcy court.

Typically, this means a bankruptcy attorney creating a payment plan for the debtor. When this payment plan ends, any remaining debts are discharged.

A VA home loan can be approved while payments are still being made under the payment plan. As long as payments have been made for at least 12 months and the bankruptcy court agrees to allow new debt, a VA loan can be approved.

Chapter 13 bankruptcy requires a regular income and allows you to retain your property. It will stay on your credit report for less time than Chapter 7, and the waiting period starts from when you file instead of when the bankruptcy is discharged.

Qualifying for a VA Loan After Chapter 13

When recovering from a Chapter 13 bankruptcy, VA-approved lenders will usually have some additional requirements:

• At least one year has to have passed since your bankruptcy filing
• Your credit score might need to be at least 620, depending on the lender
• You may need to supply additional information, and the qualification might be more difficult

If you are still paying off your debts, this will affect your debt-to-income ratio when applying. If your income is not high enough, you may not qualify for the home loan you need when your debts are considered.

Bankruptcy and Foreclosure

Bankruptcy can also mean foreclosure for some borrowers. A bankruptcy that leads to foreclosure is more common with Chapter 7, but this won’t prevent you from applying for a VA loan. While it might mean some additional paperwork and complications, you can still qualify.

If the foreclosure was on a VA loan, some of your entitlement will have been used. This means that there will be a reduced limit on the amount you can borrow without a down payment. If you qualify for more than your available remaining VA loan entitlement, you will need to find the money for a down payment to make up the difference.

How to Improve Your Chances of Being Approved for a VA Mortgage After Bankruptcy

Since you are unable to get a mortgage right away after you file for bankruptcy, you have the opportunity to increase your chances of VA loan approval during this period.

Filing for Chapter 7 and Chapter 13 will have hit your credit score hard. Fortunately, there are many things you can do to improve your credit.

Your credit score is an important factor in determining whether you get the home loan you want, as well as better terms on your loan. A better credit score might mean you have to pay a lower interest rate on the loan, something that can save you many thousands of dollars.

If your bank gives you free access to your credit score, you might already know where you stand. If you don’t have this access, you can subscribe to one of the credit bureaus or go to the AnnualCreditReport.com website to view your report for free.

Payment History

Payment history is the most significant factor in your credit score. If you miss payments, this will reduce your credit score. The report will show how many days on average you are overdue on payments. While the VA bankruptcy waiting period is in effect, make sure you do not miss any payments.

Credit Utilization

Current loan debts are the second most important factor that could be hurting your credit score. If you are using all or a large amount of your available credit, your score will be negatively affected. Lower credit utilization is better for your credit score.

Credit Age

The length of your credit history is of lower importance, but it can still help your credit score. A history of making payments on time can benefit your score, so it’s better to keep accounts open even if you don’t use them anymore.

Credit Mix

Another reason to keep accounts open is credit diversification. Lenders prefer to see a range of different credit accounts, and this is reflected in the credit score system. A mix of accounts shows you can responsibly manage different types of loans and can have a small beneficial effect on your score.

Recent Changes

Recent activity in your credit report can push down your score. Though it only has a small and temporary effect, applying for multiple different types of credit in a short time reduces your credit score.

Fixing your credit will go a long way to improve your situation when you want to apply for a mortgage, but it isn’t the only thing you can do:

Stable Income

Your lender needs to be confident in your ability to repay the loan. But if you are constantly changing jobs, they won’t get that impression. The lender is looking for stability, so try to stay with the same job at least until the loan has closed.

Be Prepared

Loan approval following bankruptcy is more difficult as the lender needs to make more checks. You should be ready for this and have the documents available if required. Collect bank statements, pay stubs, tax returns, and bankruptcy paperwork ahead of time to show the lender you are prepared.

Get Help

Working with professionals can help with the difficult post-bankruptcy mortgage loan application. Every borrower’s situation is a little different, and seeking the advice of experts can really make a difference and help you choose the best option.

Be Patient

Loan approval after bankruptcy can take longer than a typical mortgage application. You need to be ready for delays and problems that can slow down the progress.

If you work on rebuilding your credit after bankruptcy, it can pay off in the long term. When the waiting period is over, you will be in a better position to be approved for the loan you want, and with better terms.

You may have a choice of approved VA lenders with different options and slightly different requirements. If you work on improving your finances after bankruptcy, you should get the home you want with better mortgage terms. This will help you recover from what will have seemed like a financial disaster at the time.

Summing Up Getting a VA Loan After Bankruptcy

As you can see, you can still be eligible for a VA mortgage after bankruptcy. You may even find qualification for a VA loan easier than other types of lending to buy a home.

As well as offering post-bankruptcy mortgages, VA loans also provide other advantages. With VA loans, you can finance up to 100% of the purchase price and benefit from possibly better interest rates, too. If you are eligible for a VA mortgage, it’s in your best interests to explore your options so that you get your finances back on track as soon as possible to buy a house.

About the author: This article was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.

We provide award-winning customer service to clients who need to purchase a home or refinance an existing mortgage.