How to Get a VA Loan After Bankruptcy

How Bankruptcy Affects Your VA Loan Eligibility

Bankruptcy doesn't have to mean the end of your path to homeownership. Veterans who have filed for bankruptcy can still qualify for a VA loan, sometimes in as little as 12 months, depending on the type of bankruptcy filed.

There are two major types of personal bankruptcy, Chapter 7 and Chapter 13, and both can significantly affect your credit. Consumers may see their credit scores drop anywhere from 130 to 240 points following a bankruptcy, according to research from credit scoring firm FICO®.

The credit score drop alone can make qualifying for a VA loan difficult, but lenders also require borrowers to meet a minimum waiting period.

While bankruptcy can undoubtedly impact your creditworthiness and loan accessibility, the good news for VA borrowers is that the credit score hurdle is typically lower than what you'll face for conventional or even FHA loan financing.

VA Bankruptcy Waiting Periods

VA lenders require a mandatory waiting period, known as a seasoning period, before a borrower who has filed for bankruptcy is eligible to close on a new home loan.

The waiting period for a Chapter 7 bankruptcy is typically two years from the discharge date. For a Chapter 13 bankruptcy, the waiting period is shorter, and you may be eligible for a VA loan after 12 months' worth of payments have been made.

Here’s how VA loan seasoning requirements compare to other loan options:

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is known as a "liquidation" bankruptcy and forces an individual to sell certain assets to repay creditors. Once the assets are sold, the remaining debts are discharged from the individual, leaving them with a clean financial slate. The two-year waiting period for VA lenders begins after this discharge date.

Qualifying for VA Loan After Chapter 7 Bankruptcy

To get a VA loan after Chapter 7 bankruptcy, lenders typically have a few requirements they look for:

• Satisfy the minimum two-year waiting period from the discharge date
• No late payments since filing for bankruptcy, on new or existing accounts
• Rebuilt credit score (most lenders look for a FICO score of 620)
• Meet standard VA eligibility requirements

These requirements may vary from lender to lender, so it’s best to speak with a VA home loan expert to understand your specific bankruptcy situation fully.

Chapter 7 Bankruptcy Reaffirmation Agreement

A reaffirmation agreement is a legal decision made during Chapter 7 bankruptcy that allows homeowners to keep their home by agreeing to remain personally responsible for the mortgage debt. It’s important to consult with a bankruptcy attorney before making this decision, as reaffirmation has long-term financial implications.

Homeowners who do not reaffirm the mortgage will see their legal and financial responsibility for the mortgage end with the discharge. Chapter 7 bankruptcy basically wipes away your liability and what you owe on that home.

However, the lender still holds a lien on the property and can foreclose to recoup at least some of their investment, though the process can take months or years.

Certain lenders may require a Verification of Rent (VOR) to verify you’ve been making timely mortgage payments. Guidelines and policies on this can vary from lender to lender.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is known as a "reorganization bankruptcy" and creates a court-supervised debt repayment plan that typically lasts three to five years. A bankruptcy attorney helps develop this plan, and any remaining eligible debt may be discharged once the plan is completed.

You may still qualify for a VA home loan during a Chapter 13 bankruptcy if you’ve made on-time payments for at least 12 months. Also, you will likely need consent from your Chapter 13 bankruptcy trustee to take on new debt, such as a mortgage.

Another key difference with Chapter 13 is that the VA loan seasoning period starts from the bankruptcy filing date, not the discharge date. This can be a significant advantage over Chapter 7, where the wait begins after discharge. Keep in mind that the 12 consecutive on-time payments may slightly adjust this timeline, since lenders often prioritize that over the specific bankruptcy filing date.

If you’re not eligible for Chapter 7 and can repay a portion of your debt, Chapter 13 may be a better option. You’re able to retain your property, and the bankruptcy could potentially fall off your credit report after seven years.

Qualifying for VA Loan After Chapter 13 Bankruptcy

The good news is you may be able to get a VA loan after a Chapter 13 bankruptcy sooner than after a Chapter 7 bankruptcy. Here are a few requirements VA lenders typically look for:

• Fulfill at least 12 months of on-time payments in the repayment plan
• Court or trustee approval if the bankruptcy is not yet discharged
• Rebuilt credit score (most lenders look for a FICO score of 620)
• No new missed payments or major debt since filing
• Additional information about any late payments that occur within 12 months of the new home loan application

It may be more challenging to qualify for a VA loan after a Chapter 13 bankruptcy due to the debt repayment plan and the VA’s debt-to-income ratio. Be sure to talk to a VA lender about your specific situation before applying.

Bankruptcy Followed By VA Foreclosure

Bankruptcy and foreclosure sometimes occur together, but Veterans going through a foreclosure with a VA loan don't necessarily lose their VA loan eligibility.

Since foreclosure typically requires prospective VA borrowers to wait at least two years before obtaining a home loan, a common concern is that Veterans will have to wait four years or more to move forward. That's not necessarily the case.

Sometimes, foreclosure proceedings don't start right away. If the Veteran remains in their home after the bankruptcy, they can seek a new VA loan once the two-year bankruptcy seasoning period is complete, as long as the foreclosure process hasn't started.

Keep in mind that policies and guidelines on foreclosures and bankruptcies can vary by lender. These situations are always viewed on a case-by-case basis. Let’s review some scenarios.

VA Foreclosure With Chapter 7 Bankruptcy

When you file Chapter 7 and don’t reaffirm your VA loan, you're no longer personally liable for that mortgage debt. But that doesn’t always mean immediate foreclosure. In some cases, lenders allow you to stay in the home temporarily, especially if you're still making voluntary payments.

While this may buy time, it also creates a gray area. If you apply for another VA loan down the line, lenders will want to understand:

• Did you continue making payments after discharge?
• Did the lender officially foreclose, and if so, when?
• Was there any written agreement about your occupancy?

These details help determine when your VA loan entitlement can be restored and whether you've demonstrated the financial responsibility to qualify again.

VA Foreclosure With Chapter 13 Bankruptcy

Chapter 13 is designed to help you repay debts over time, including catching up on your mortgage. But if you’re unable to maintain payments and the lender proceeds with foreclosure, the situation becomes more complicated.

In these cases, the foreclosure sale date starts the VA loan waiting period clock. Even if you were in a repayment plan, lenders will focus on:

• Why the repayment plan broke down
• Whether you tried to keep the home or walked away
• How you’ve managed your finances since the foreclosure

This scenario can create a longer path back to VA loan eligibility, not because of the bankruptcy alone, but because of the loss of the home tied to your VA entitlement.

How to Increase Chances of VA Loan Approval After Bankruptcy

For Veterans seeking a post-bankruptcy loan, the bankruptcy seasoning period is a great time to work on boosting your credit and overall financial health. Regardless of the type of bankruptcy, most lenders look at how you have financially recovered.

Here are some tips we’ve compiled to help guide you to VA homeownership:

1. Rebuild Your Credit

Rebuilding your credit is crucial after bankruptcy. Start by making timely payments on all your bills and debts, including utilities, credit cards and loans. It’s best to gradually establish a positive payment history to demonstrate your financial responsibility.

Keep your credit card balances low, avoid taking on excessive new debt and monitor your credit score regularly. Consistently improving your credit score will help you meet most lenders’ VA loan credit requirements.

2. Save for a Down Payment

While a down payment on a VA loan is usually not required, having some savings to put down can strengthen your loan application. It shows the lender you have the ability to save and manage your finances responsibly.

A down payment can also help reduce the loan amount and VA Funding Fee, making it more appealing to lenders and potentially lowering your interest rate.

3. Maintain Stable Employment

VA lenders value stability when considering loan applications. Maintaining a steady employment history and income stream reassures lenders that you have the means to repay the loan. Frequent job changes during the loan application process may make it more difficult, as it may raise concerns about your ability to sustain a stable income.

4. Work With a Knowledgeable VA Lender

Choose a lender experienced in VA loans and familiar with bankruptcy guidelines. They can guide you through the process, provide valuable insights and help you navigate any unique requirements. A knowledgeable VA lender can assess your specific situation, offer tailored advice and increase your chances of approval.

5. Be Patient and Prepared

Understand that the road to loan approval after bankruptcy may take time. Being patient and committed to improving your financial profile is essential. Gather all necessary documents such as tax returns, pay stubs, bank statements and bankruptcy discharge paperwork to ensure a smooth application process.

Remember, each VA lender may have slightly different requirements, so it's beneficial to explore multiple options and compare offers. By rebuilding your credit, demonstrating stability and working with the right lender, you can significantly increase your chances of obtaining a VA loan after bankruptcy.

Talk to a Veterans United Home Loan Specialist at 855-870-8845 or get started online today to begin your VA homebuying journey.