It happened – you lost it all. Maybe you got in over your head and had to file bankruptcy. Or maybe you lost your job not due to your own doing. Whatever the case may be, you are labeled – or so you think.
It used to be this way. People that filed for BK couldn’t apply for a mortgage for many years. Some programs required as much as a 7-10 year waiting period. Today, a lot has changed. The VA loan especially, has become rather lenient for people in your position.
Read on to see how long you have to wait after filing for BK.
A VA Loan After a Chapter 7 Bankruptcy
Chapter 7 bankruptcy means you wrote it all off. You couldn’t make good on your debts and needed a fresh start. It happens to the best of us. Once you get that fresh start, how long do you have to wait to get a VA loan?
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Right now, it’s just 2 years. The clock doesn’t start running until the date of discharge. This is when the judge officially clears your debt. No creditors can come after you for the money. This is when the clock starts ticking. After 24 months, you can then apply for a VA loan.
Don’t think you can just get a VA loan as soon as the 24 months has come and gone, though. You have to earn the loan. In other words, you have to build your credit back up.
Because you wiped the slate clean, you probably have a pretty low credit score right after the BK. Use those 24 months to reestablish yourself. Apply for a secured credit card and pay it off every month. After a while apply for an unsecured credit card and do the same thing. Don’t get into debt, but you have to show that you are financially responsible.
Aside from your credit history, you’ll also need to make sure your income is stable. If you filed BK because you lost your job, you’ll need to reestablish your job history again. Find a job and stick with it. Make sure your income is stable. If you can’t find a job, consider getting some training or going back to school to help you get into another field.
You’ll want to make sure you have enough disposable income to help you get approved. The VA doesn’t care much about debt ratios. But, they do care about your residual income. Any money you have left after paying your monthly obligations is residual income. This doesn’t include the money you need for daily living expenses. This is what the VA wants your residual income to cover. They figure if they make sure you have enough money left over each month, you won’t have to sacrifice. This lowers the risk of default on your mortgage.
Combining these positive factors with the time lapse between your bankruptcy and the mortgage application should give you a good shot at a VA loan.
A VA Loan After a Chapter 13 Bankruptcy
If you filed for a Chapter 13 bankruptcy, you didn’t write everything off. Instead, you are making good on your debt, just in a restructured manner. You probably realized you couldn’t make it work and asked for help. Your trustee helped you come up with a plan that will pay off your debts in a way that you can afford them.
This restructuring of debts isn’t as detrimental to your credit as a Chapter 7 BK. It hurts it, just not as much. Because of its lighter impact, the waiting period is only 1 year from the filing date. Since you don’t have a discharge date, the lender goes off the filing date.
Because you are still paying on your debts, though, the trustee must provide the lender with proof that you make your payments on time. If you have any late payments on your restructured debts in the last 12 months, you won’t be eligible.
In addition, if your trustee doesn’t approve of the new mortgage debt, you won’t receive approval. The trustee has to ensure that you have enough money to cover not only the mortgage payment, but also your Chapter 13 debts as well.
The same conditions that apply to the Chapter 7 BK apply to this situation. You’ll have some credit repairing you need to do. You’ll also have to make sure you have plenty of compensating factors. Try to do the following:
- Increase your credit score by paying your bills on time. Don’t close any old accounts. Also, don’t open any new accounts unless the trustee approves it.
- Make sure your income is stable and has bene for the last 2 years.
- Come up with compensating factors, such as assets on hand or a low debt ratio to make your application look more favorable.
Just because 12 months passed from the date you filed for Chapter 13 BK, doesn’t mean you’ll automatically qualify. You have to prove you are ready.
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Calculating your Entitlement After BK
Now the bigger question is how much loan can you obtain? You won’t have full entitlement for your VA loan this time around. Any entitlement you used and defaulted on is now gone.
This is only the case if your home was involved in the bankruptcy. For example, if you gave your home up because you couldn’t afford it during the BK proceedings, you’ll lose your entitlement. If, on the other hand, you kept up with your mortgage payments, you’ll still have your entitlement.
The entitlement is 25% of the loan amount you may receive. Every veteran starts off with $36,000 entitlement. This comes out to a $144,000 loan. Since $144,000 isn’t enough to buy a home in many parts of the country, veterans can also get bonus entitlement. You can receive an additional $70,025, which means a $280,100 loan. In total, you can receive up to $424,100 in loans.
If you defaulted on any part of the original loan, your entitlement will be decreased accordingly. Any money you have left after the default will still be available, though.
For example, if you defaulted on a $175,000 loan you’d still have $249,000 left for a new loan.
It is possible to get a VA loan after bankruptcy. In fact, the VA has some of the most lenient guidelines even after a BK. However, no matter where you get your loan, you should make sure you can truly afford the new loan. Don’t just look at the payment on paper. Work it into your budget to make sure you can truly afford it without sacrificing.
This way you can take on a new loan with confidence and earn the rewards of home ownership.
