I receive numerous VA loan questions in regards to bankruptcies (BK) and foreclosures and trying to determine how long the borrower has to wait after their bankruptcy before they become eligible for a VA home loan. Or is there anything they can do while they wait to help their chances of getting approved for a VA loan once their waiting period is up? So let's take a look because as of right now the VA requirements are much more lenient than both conventional and FHA's.
Chapter 7 Bankruptcy
First, a chapter 7 bankruptcy involves a complete discharge of debtors. Once the petition is file and accepted by the court and the BK is finalized the borrower is released from liability from the creditors. Generally, with a chapter 7 bankruptcy the VA underwriting guidelines require a 2 years waiting period from the discharge date of the bankruptcy before financing becomes available. There are, however, certain uncontrollable circumstances such as medical conditions or job loss that allow for financing 1 year after the discharge date but these are very rare. To contrast this with conventional guidelines at the time of the article Fannie Mae is now requiring a 4 year waiting period after a chapter 7 BK.
Chapter 13 Bankruptcy
A chapter 13 on the other hand is called a wage earners plan. A trustee is appointed from the court and a repayment plan is negotiated. A veteran may actually be eligible for a VA mortgage while in the chapter 13 bankruptcy; but will need to have at least made 12 on time payments and have approval for the loan by the court trustee. Also, after the chapter 13 is finished the veteran borrower is eligible immediately. Fannie Mae requires a 2 year waiting period after the discharge.
The VA guidelines state the foreclosure period follow the same rules as the Chapter 7 Bankruptcy. Basically, the veteran borrower needs to wait 2 years. Fannie Mae requires a 5 year waiting period now after the completion of the foreclosure and FHA is 3 years, ouch.
Tips for after a Bankruptcy
As a top VA lender that has dealt with their fair share of bankruptcies we've put together a few tips that borrower can put to go use.
Don't ever miss payments on your creditors going forward. This may sound like a no brainer but nothing will take a score down faster than missing a payment with a creditor plus an underwriter will be looking at your credit with a fine tooth comb after the bankruptcy.
I strongly suggest that a person reestablish at least 3 trade lines to build credit and also offset some of the negative blemishes that they bankruptcy has created. I can't tell borrower that fall into this category enough that this is important because for a lot of individuals they decided to pay their bills with strictly cash. While Dave Ramsey and others would find this financially wise decision to make when it comes to apply for a mortgage without good credit score you may not get financing. I recommend credit cards if you can get approved for them or a secured credit card if financing becomes difficult. Then simply keep a small balance on the card and pay it off every month.
I recommend after the bankruptcy has been discharged that you mail in a full copy of your discharge paperwork with all of the appropriate schedules the three credit bureaus Equifax, Experian and TransUnion. Often time some of the accounts included in the bankruptcy won't reflect that accurately.
I also suggest you start by pulling your credit at least once a year from each of the nationwide consumer credit reporting companies. Keep track of what's gone on and make sure there are no inaccuracies by the time you are ready to apply for a VA loan.
Of course the VA loan bankruptcy guidelines could change or be amended in the future but so far the majority of the VA guidelines have stayed unchanged for the last several years.