Your financial life may take an unexpected turn. You could get in over your head with credit card debt, or a divorce or job loss can flip your personal finances upside down; whatever the situation, filing for bankruptcy protection may be the only solution.
Filing bankruptcy can reorganize or wipe out your debt. It's an opportunity to start over and get creditors off your back. But filing bankruptcy can also drop your credit score by more than 100 points, making it harder to qualify for a mortgage. Fortunately, the effects of a bankruptcy aren't permanent. A Chapter 7 bankruptcy falls off your credit report after 10 years, whereas a chapter 13 falls off your credit report after seven years.
If you're active-duty military, a veteran, a reservist or the spouse of an eligible service member, you may have questions about getting a VA home loan after bankruptcy.
The good news is that it’s possible, but you’ll need to know the rules and requirements for qualifying.
Wait One to Two Years after a Bankruptcy
In some cases, you can qualify for a VA home loan after bankruptcy faster than qualifying for a conventional mortgage. Fannie Mae recently lowered the wait period from four years to two years for a conventional loan. There is a similar wait period for a VA loan depending on the type of bankruptcy. If you file a Chapter 7 bankruptcy, you have to wait at least two years from your discharge date, not the filing date. But if you file a Chapter 13 bankruptcy, which reorganizes your debt, you only have to wait a minimum of one year from your filing date.
On average, it takes about three to five years to resolve a chapter 13 bankruptcy, at which time any remaining debt is discharged.
Although it is possible to get approved for a VA home loan only one year after a chapter 13 filing, not everyone will qualify for a home. Getting the mortgage is dependent on whether you receive permission from your bankruptcy trustee, who will review your finances to ensure that a mortgage won’t create a hardship.
Regardless of the type of bankruptcy, getting a VA loan also requires a clean credit history for at least 12 months, starting from the time of your bankruptcy filing or discharge. You must maintain excellent credit habits, which primarily includes paying your bills on time and sticking with your new repayment plan.
Rebuild Credit Score
Even if you’re excited to buy and you’re beyond the required wait period, you may come to the realization that you’re not ready to apply for a mortgage after one or two years. It might be wiser to wait three, four or five years. This is okay. In fact, extending the wait gives you extra time to improve your credit score. Getting a mortgage generally requires a minimum credit score of 620. But ideally, you want a credit score in the mid-700s.
If you’ve filed bankruptcy and you're looking to get a VA home loan in the next few years, there are several steps to ensure you receive an affordable mortgage rate. It takes seven to 10 years for a bankruptcy to fall off your record, but you can undo the effects of a bankruptcy in two or three years.
1. Get new credit. If all your debts were included in the bankruptcy, you can rebuild your credit by getting new credit. Start with a secured credit card. These cards feature a low credit limit and require a security deposit. Your deposit will match your credit line. If you give the bank a $250 deposit, you'll get a credit line of $250. Just know that secured credit cards can get expensive, so you’ll need to shop around. Some secured credit cards offer competitive rates, but you’ll pay maintenance fees, setup fees and an annual fee.
2. Pay your bills on time. Although you’ll need to list all your debts when filing bankruptcy, you don’t have to include all your debts in the bankruptcy. For example, you can reaffirm a car loan and keep the car, and student loans aren’t usually dischargeable in bankruptcy. If you maintain some of your accounts, make sure you pay these creditors on time every month. And if you’re reorganizing your debt, stay current and don’t fall behind on payments. Timely payments add points to your credit score.
If you have the credit score and resources to purchase a property, and you’re confident in your ability to manage a mortgage, contact a VA-approved lender to begin the steps of getting a VA home loan.
Filing bankruptcy doesn’t destroy your chances of buying a home. Learn how to get a VA loan after bankruptcy.