Indeed, a foreclosure and a bankruptcy can spell disaster for your credit score. But as a veteran or an active duty military member, that does not essentially lock you out of eligibility from VA loans.
VA-insured mortgages are considered one of the best mortgage programs out there today. It allows eligible individuals take out financing to pay for a home with qualification standards that are way less stringent than any other existent mortgage programs in the country today.
Features of a VA loan
- With a VA loan, you can choose from a 15, 20 or 30-year fixed rate loan or may opt for a 5-year adjustable rate mortgage loan
- Jumbo loans are possible
- Refinance options are advantageous
- No down payment required
- No mortgage insurance premium is slapped into your monthly mortgage payments
- No credit check required
The Case of Bankruptcy
There are two types of bankruptcy: Chapter 7 and Chapter 13, both of which are devastating to your score. Expect a drop of around 100 to 200 points in your FICO. A bankruptcy record can almost automatically turn down your approval for a mortgage loan, but VA lenders take an extra step of examining whether you will be able to get back on your feet within two years.
VA lenders usually allow eligible members with a bankruptcy record to qualify after two years have passed, given the member has financially recovered. However, qualifying for the said loan is still largely dependent on the lender, who may operate within their own measures to make sure they are protected of the risk.
The Case of Foreclosures
There are three terms that you need to differentiate when it comes to foreclosures: a standard foreclosure; a short sale, and a deed-in-lieu of foreclosure.
A standard foreclosure occurs when you fail to make your payments and so the bank repossesses your home via formal proceedings. A short sale occurs when the lender agrees to let the borrower who is behind on his or her payments sell the property for the purpose of recovering some of the cost. A deed-in-lieu, on the other hand, allows the borrower to return the property to the lender without the foreclosure proceedings. Whichever the form, none is really good news for the affected homeowner.
Similar with the aftermath of a bankruptcy, a foreclosure could cause a drop of around 160 points in your FICO and deny you access to most mortgage programs. If you still want to try your luck with your VA entitlement, you can, but you might have to wait for a couple of years or three to get qualified again. There are exceptions to this rule, including getting a mortgage with lenders who do not have a seasoning period following a short sale.
The waiting time could be enough to help you get back on track, grow your credit, and be a good fit once more for financing. Bankruptcy and foreclosure may indeed tackle you hard, but it’s the not the end of the road for you. As an eligible borrower, rising from the limbo of financial disaster is not impossible with a VA loan.