Bankruptcy and Your VA Loan Benefit

This article is meant to help those who have been through a bankruptcy and are looking to get their financial feet back under them and move forward in their life’s journey. No segment of the economy has been untouched by the real estate collapse. Veterans and their families need to know the future looks bright, no matter the past.

If real estate and financial markets are terrains and the last few years have been a journey through them, then (wow), we are emerging from some bad jungle! The unfortunate part of this is that you or someone close to you likely has been financially harmed by the difficulty of the way.

How does Bankruptcy Affect Your VA Loan?

How does bankruptcy affect your ability to obtain a VA home loan? For most prospective VA borrowers, it’s pretty much good news: Experiencing a bankruptcy doesn’t mean you’re automatically out of the running for another VA-backed mortgage down the road.

Bankruptcy filings in federal court dropped 12 percent in the fiscal year 2013. So, yes, there is a recovery there. Some military personnel and vets and their families continue to seek shelter using either a Chapter 7 or Chapter 13 protection. The good news is that a responsible homeowner who has used Chapter 7 or Chapter 13 bankruptcy protection can, without a doubt, get their overall fiscal health back on track.

Accept this dose of reality: a bankruptcy filing has negative consequences, which almost without fail includes a harpoon into your credit score. The road back goes a bit uphill and requires your hard work and dedication—pretty much what you would expect to get back on track after a derailment.

The hard work and dedication part are crucial because a new lender is going to want:

    • an explanation of your bankruptcy
    • evidence that you have re-established good credit
    • proof of job stability

It’s the Discharge Date!

Here’s key information: VA lenders typically won’t talk with you until you’re at least two years beyond the date of a bankruptcy discharge. Remember this detail. The clock starts ticking with the discharge, not with the initial bankruptcy filing.

It can be a different story for veterans who file for Chapter 13 bankruptcy protection. If your bankruptcy was Chapter 13 you may be eligible for a VA loan just 12 months removed from your filing date. Satisfactory credit and no late payments during that time will be the critical factors, with a stable job situation. You will also need to obtain permission from the bankruptcy trustee to take on those new monthly payments.

Losing a Home to Bankruptcy or Foreclosure

Home ownership is a road that can have many forks when it comes to bankruptcy or foreclosure.  Some homeowners will essentially give back their home during the bankruptcy process. Others may lose theirs to foreclosure months or even years after the fact.

It’s common to have a short sale or foreclosure after a bankruptcy discharges. Mortgage lenders face the challenge of trying to determine the status of a mortgage and whether it was discharged in a bankruptcy. Policies can vary on this, so it’s important to check with a loan specialist.

As long as your mortgage debt is truly discharged with the bankruptcy, a foreclosure that follows in the wake wouldn’t “restart” your two-year waiting period. The good news here is there should be no double-whammy with a foreclosure that happens months or years down the road.

Boosting Your Credit

A hurdle to getting a VA loan after bankruptcy will be your credit score. This may be the most critical factor that you can directly address. Spending those two years after the discharge working on credit repair is critical, and making your payments on-time is not less important.

A bankruptcy is not the end of the world. The VA has a policy that is not overly harsh with the veteran who has had the misfortune of a bankruptcy. The VA mortgage loan benefit continues in force and in availability to the person who has a recovery plan and works that plan.

We’re and we would be happy to answer your questions.

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