Having a bankruptcy or foreclosure on your credit report can have a negative impact on your home buying power. Many borrowers who have experienced foreclosure or had to file for bankruptcy can still obtain a VA loan as long as they take the necessary steps to remedy their credit issues.
Fortunately for many buyers, it is possible to receive another VA loan after going into foreclosure, short sale, or deed in lieu of foreclosure. Most of the time, buyers will have to wait at least two years before applying for a new VA mortgage. There programs that can help veterans reestablish their credit. You will have to figure out how much VA loan entitlement you have left, if any, because some of it will be tied up on the foreclosed property. After you do this, your loan originator will be able to show you what loan programs you qualify for.
Veterans who are eligible for VA loans have what is known as "entitlement," which is essentially a financial guarantee from the VA to repay a portion of your mortgage if it goes into default. In most areas, the VA will pay up to one fourth of the amount of the loan. The most veterans can borrow with no money down is capped at $417,000, which means the VA would repay up to $104,250 of the loan.
When a buyer purchases a home with a VA loan, they will use some or all of their entitlement, depending on the amount of the loan. If you lose the home because of foreclosure, you will most likely lose the amount left on the loan in entitlement. This is a grim prospect, but fortunately, there are still options for available.
If you are wanting to obtain a VA loan after foreclosure, You will need to view your COE to see how much VA loan entitlement you have left over to qualify for a mortgage. You may still have enough money left on your entitlement to receive another loan.
Just because you have enough entitlement doesn’t mean you will automatically qualify for a VA loan. As with all other mortgages, you will need to meet credit requirements and have an acceptable debt-to-income ratio to get a VA ensured mortgage. When using your entitlement for a second time, also known as second tier entitlement, the minimum loan amount will be lower. Currently it is set at $144,001. Getting a VA loan after foreclosure can be challenging, even for experienced mortgage experts. Bad Credit Mortgage Lenders love a challenge and deal with these situations often.
Bankruptcy can significantly lower your credit profile. The amount of points your credit score will fall depends on many elements, but FOCP states that borrowers’ credit scores drop 240 points from a bankruptcy. This is a major dent in your credit score, but it doesn’t mean that you cannot still qualify for a VA home Loan.
The loan guidelines for home buyers with a bankruptcy will differ depending on whether they filed for Chapter 7 or Chapter 13 bankruptcy.
For Chapter 7 bankruptcy, there is a waiting period minimum of two years after the discharge date before a borrower can apply for another VA loan. Borrowers must also provide proof that they have established good credit since then as well as stable income.
With a Chapter 13 bankruptcy, the qualifying guidelines are a bit different. A borrower can still obtain a VA loan while they are making payments on their Chapter 13 bankruptcy. Borrowers are required to show that they have made payments for a minimum of one year. Just as with Chapter 7 bankruptcy, a full explanation of bankruptcy is needed in addition to documents supporting good credit.
Would be home buyers who are still in the two year waiting period before getting another VA loan should be taking steps to prepare for their application. Borrowers should stay current on all their bills, review their credit report, and beware of credit repair services. Bankruptcy can be a tough pill to swallow, but it doesn’t have to prevent you from owning a home. If you dedicate time and effort toward reestablishing your credit and staying current on all your financial obligations, a VA home loan might be the best option for your mortgage.