All too often, an otherwise rosy financial picture can be clouded by unexpected (and common) events: job loss, a reduction in pay, medical expenses, divorce, lawsuits, or maybe even plain old mismanagement of your finances. While maybe not the most appealing path back toward financial normality, bankruptcy offers an opportunity to push the reset button.
If you are a military member or veteran who has filed for bankruptcy or is considering it, you might wonder about how it might impact your ability to buy a house through the VA loan program. The good news is, you won’t be locked out of the ability to buy a home through the VA or other conventional loan programs. And you won’t be forced to make choices between paying off your debts and buying a house.
But, like most things involving financial entanglements, the aftermath of a bankruptcy can be complicated, so you should know what awaits you and how to reset your financial picture in order to reach your goal of homeownership.
Can I Even Get a VA Home Loan After Bankruptcy?
Buying a house following a bankruptcy is possible, particularly if you borrow through the VA loan program. In fact, it may be easier to qualify for VA loans versus an FHA or conventional loan following a bankruptcy. Eligibility will depend on a few factors: the type of bankruptcy filed, the reasons for the filing and the borrower’s qualification for VA eligibility. A lender can help you understand your VA loan eligibility and what you need to do in order to qualify.
VA Loan Bankruptcy Waiting Periods
Opting for a bankruptcy comes with its share of stipulations and will require a cooling off period before you can once again borrow money. Lenders call this a “seasoning period.” VA loans typically require a seasoning period of two years for a Chapter 7 bankruptcy but just 12 months for a Chapter 13 filing. For comparison, the seasoning period can be significantly longer for other conventional loan programs, with some programs requiring up to four years for a Chapter 7 filing and two years for a Chapter 13.
Since the aftermath of a filing can differ between a Chapter 7 and a Chapter 13 bankruptcy, it’s important to understand the two options.
VA Loans and Chapter 7 Bankruptcy
Opting for a Chapter 7 filing will allow you to sell assets and property in order to pay off your debts. Once you’ve exhausted your assets, any remaining debts are forgiven and you’re allowed to reset with a blank financial slate. There are, however, some drawbacks to the Chapter 7 option: First, your property — including houses, cars and even household items – will all be sold. Second, you’re not permitted to catch up on any missed payments in order to settle debts.
The VA loan program allows a Chapter 7 bankruptcy to be disregarded after two years. However, you might qualify after just 12 months if you’re able to establish strong credit after your bankruptcy.
VA Loans and Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, also known as a “reorganization bankruptcy,” allows an individual to set up a repayment plan and to keep their property. Once a debt repayment plan is satisfied, which is typically set up between the court and a bankruptcy attorney, any remaining debt is forgiven. What’s more, a Chapter 13 filing might be a better option because it falls off a credit report after 7 years. If you’re able to make at least 12 months of payments toward your repayment plan, you may be eligible for a VA loan.
VA Loans and Foreclosure
Like bankruptcy, a foreclosure on your credit history can be a pretty large obstacle to overcome in terms of landing a VA loan, but it’s not insurmountable. Whether paired with a bankruptcy (most common in Chapter 7 filings) or not, a foreclosure won’t disqualify you from applying for the VA home loan program. Untangling the knot will begin with a letter of explanation that spells out the circumstances that led to your financial troubles.
If your foreclosed home was guaranteed by the VA loan, you may not have full use of your full VA entitlement again. Talk to your lender to understand how to navigate this process.
How To Increase Chances of VA Loan Approval After Bankruptcy
How you spend the time following a bankruptcy and/or foreclosure will be critical to your financial recovery. Remember, you aren’t permanently disqualified from getting a VA loan, but you will need to begin the work of establishing a history of good credit while meeting or exceeding financial and income standards. Your mission after a bankruptcy is to rebuild your financial muscle, and the seasoning period is in place to do just that. Make good use of this time by following some straightforward tips: pay your bills on time, minimize use of credit, lower your debt-to-income ratio, maintain steady employment and work on your explanation letter. Let’s look at each of these:
Focus On Ways To Build a Strong Credit Score
Your credit score is going to take a serious hit following a bankruptcy filing. If you’re stuck in the waiting period to reestablish your VA loan eligibility, then get to work undoing the damage. Establish a history of paying your current bills on time and in full. This will help you rebuild and improve your credit score. Also, thoroughly review your credit report for errors and then make an effort to correct any mistakes you find. Any and all efforts will increase your chances of future qualification.
Pay Bills on Time
Staying on top of your bills, from rent and utility payments to medical expenses, will have the potential to improve your credit score. What’s more, following a bankruptcy filing, you may retain some debts that weren’t discharged. Making on-time, full payments and paying down those debts should improve your score and help demonstrate to a would-be lender that you have learned from your mistakes.
Lower Your Debt-to-Income Ratio (DTI)
Debt-to-income ratio is the percentage of your gross monthly income that is directed toward your debts, such as housing, auto loans, utilities and credit card payments. A DTI ratio is also one of the most significant factors weighed by lenders when they consider loan approval. Your mission during your waiting period should be to manage your debt and improve your DTI, either by increasing your income, paying off bills, or both.
Keep Your Credit Utilization Ratio Low
Your credit utilization ratio — the percentage of total credit used from the credit available from loans and credit cards — is another key measurement that helps determine your credit score. Lenders will study this number to understand how you manage your debt. In short, it’s best to have a low credit utilization as it will show that you’re not relying on your credit cards to pay your bills.
Show You Have a Reliable Source of Income
There may be nothing that surpasses having a reliable source of income in measuring one’s ability to repay a loan, so maintaining a job should be one of your goals during the waiting period. Changing jobs won’t impact your credit score, but borrowers may see job hopping as something of a risk. In fact, lenders may want you to stay in a job for at least two years to be comfortable backing a loan. Demonstrating a reliable income source increases the chances of a VA home loan approval.
Write an Explanation Letter
As you set out to reestablish your borrowing ability, remember that a bankruptcy will raise red flags for lenders. Providing a letter of explanation will allow you to explain the circumstances that led you to bankruptcy court. You will also be able to highlight the changes you’ve made during your waiting period, such as rebuilding your credit score, lowering your DTI, or finding additional sources of income. All in all, the letter is an opportunity to provide context to your history while explaining the steps you’ve taken to repair your financial condition.
More About VA Loans
A VA loan may be the most valuable of the many great benefits extended to military personnel and veterans. Because the program is very forgiving to those with low credit scores and even bankruptcies or foreclosures, you’ll have every opportunity to unlock a path to homeownership no matter what financial hardships you might face.
- Learn about options for “Financial Help for Veterans,” a list of resources that can help with everyday expenses like rent and transportation and more long-term assistance.
- Wiping out credit card debt can help improve your Debt-to-Income Ratio or Credit Utilization Ratio, if you know how. Explore “Paying Off Credit Card Debt: Tips & Methods” for tips on how to formulate your winning plan.
Scams are around every corner in the financial world, including credit repair schemes that promise to quickly erase financial blunders from your credit report — for a price. Learn how to spot these hustles and what you can really do to untangle your financial picture by checking out “What is a Credit Repair Scam?”
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