Navigating the VA Loan Process After Bankruptcy or Foreclosure
Being foreclosed on or being forced to file bankruptcy is an experience nobody wants to go through. People who have experienced foreclosures or bankruptcies often assume that they'll never be able to own a home again because their credit has been ruined and they'll never be able to qualify for another mortgage.
However, this is not the case. There are still several ways that you may be able to qualify for a mortgage so that you can own a home again. For example, if you are a veteran, you may be able to qualify for a VA loan despite a credit history that may be blemished by a foreclosure or a bankruptcy.
What Is The “Seasoning Period” After Bankruptcy? How Long Will I Have To Wait?
A seasoning period is a set amount of time that has to pass following your bankruptcy before you can qualify for another loan. Lenders have seasoning periods because they can't be expected to hand out loans to borrowers who have just filed for bankruptcy. Doing so would be irresponsible, especially since borrowers who have recently filed for bankruptcy cannot take on more debt.
There are two seasoning periods depending on the type of bankruptcy you filed. If you filed for Chapter 7 bankruptcy, your seasoning period will be two years. This means you won't be able to qualify for a VA loan until two years have passed since the day you filed for Chapter 7 bankruptcy. If you filed for Chapter 13 bankruptcy, the seasoning period will only be one year.
Bankruptcy with a Mortgage
If you are a homeowner currently paying an existing mortgage and you're forced to file for bankruptcy, you'll want to know what happens to that mortgage. If you file for Chapter 13, you won't have to worry about your home mortgage. It will not affect your mortgage or your payments in any way and you can continue making payments as usual.
If you file for Chapter 7 bankruptcy while paying a mortgage and your home is exempt, you can continue making your mortgage payments. Your bankruptcy will discharge personal liability for the home loan at the end of your case; however, the security interest of the lender will remain. This means that the lender will be able to foreclose if you don't make your payments. It's worth noting that if your house has a significant amount of nonexempt equity, then the trustee appointed to your case can sell it.
With a Reaffirmation
When you file for Chapter 7 bankruptcy, you can choose to sign a reaffirmation agreement with your mortgage lender. This agreement signifies your intent to keep making payments to the lender and that the court will not discharge the loan as part of your bankruptcy filing. Of course, if you do not make your payments, you risk losing the house to foreclosure and will remain liable to some or all of the outstanding balance according to the reaffirmation agreement.
While a reaffirmation is essentially a good faith agreement between you and your mortgage lender, it's not necessary. In fact, most lenders don't require reaffirmations even if you file for bankruptcy, although they may request one so that they can continue sending out statements and reporting payments. However, there's no real risk that they will foreclose on your property if you file for bankruptcy as long as you continue payments; most lenders will want to avoid foreclosure if possible.
Bankruptcy Before Foreclosure
Generally speaking, if you know your house is going to be foreclosed on, it's better to file for bankruptcy first instead of waiting until after your home has been foreclosed. If your house is foreclosed on, it may be sold for less than what you still owe. The difference is known as a deficiency and the lender may come after you to obtain that deficiency (although some states, like California, prohibit lenders from doing this).
Lenders will have to file a lawsuit to obtain this deficiency and many choose not to do so because of the legal costs (and because the borrower rarely has the money to cover the deficiency in such cases). If the lender does forgive the deficiency, you may end up owing taxes on it. If you file for bankruptcy after you've been foreclosed on, it will wipe out the deficiency debt you may have. However, you will still owe tax on the deficiency.
By filing for bankruptcy before your home is foreclosed, your mortgage debt will be discharged. You will still need to make your mortgage payments since the lien will remain--and if you fail to make your payments following your bankruptcy, the lender can still foreclose. However, because there won't be any mortgage debt, there will be no deficiency following a foreclosure sale.
VA Loans After A Short Sale
A short sale refers to when a homeowner is allowed to sell their home for less than what they owe to their lender. This can happen during economic downturns when property values may dip below the value at which they were bought. Lenders often allow short sales so that both parties can avoid the expenses and lengthy process involved in a foreclosure. However, if you do execute a short sale, you may be curious as to whether you'll still be able to obtain a VA loan afterward.
The VA does not have strict guidelines in place pertaining to VA loan qualification following a short sale. For example, there is no established seasoning period following a short sale; however, the VA does typically encourage a seasoning period of two years. If you're a military homebuyer, there is no recommended seasoning period for applying for a VA loan following a short sale, although lenders may still stick to a two year seasoning period.
Just keep in mind that not all lenders have the same policies, so while some may enforce a two year seasoning period, others may not have any seasoning period for military homebuyers at all (as long as they did not default on a federal loan).
VA Loans After Conventional or FHA Foreclosure
If you default on a conventional loan or an FHA loan, you may lose your home to foreclosure. Fortunately, you may be able to get your finances in order to the point where you feel comfortable buying a house again. When this happens, you may start looking into VA loans if you're a veteran or active military member. However, there are a few things you'll want to know if you plan to apply for a VA loan following a conventional or FHA foreclosure.
If you experience foreclosure that occurs after defaulting on a conventional loan, you'll likely have have to wait at least two years following the date of your foreclosure before you can apply for a VA loan. If you've defaulted on an FHA loan, you'll have to wait even longer--three years--before you can qualify for a VA loan.
VA Loans After a VA Foreclosure
If you already bought a house using a VA loan and defaulted on that loan, you might assume that there's no way you can obtain another VA loan now that you have a VA foreclosure on your record. Fortunately, this is not true. Typically, you'll need to wait two years from the point of foreclosure; however, some VA lenders have no waiting period whatsoever.
Other Considerations and Final Thoughts
One thing to keep in mind if you defaulted on a VA loan is how much VA loan entitlement you have. If you're a veteran that's eligible for a VA home loan, it means you have a VA loan entitlement, which is a financial commitment from the VA to repay part of your loan in the event that you default. You can use a part of this entitlement whenever you purchase a house. You lose this part of your entitlement that you used on your house if you default and the only way to get it back is to prepay the VA in full.
Second Tier Entitlement
Even if you default on your original home and lose the VA loan entitlement you used towards it, you may still have funds left in your loan entitlement that can be put towards a second VA loan. This is known as second tier entitlement.