The VA Loan Bankruptcy Waiting Period, Explained
After bankruptcy, most potential home buyers are subject to a “waiting period” before they can qualify for a VA loan. With a Chapter 13 bankruptcy, there is no waiting period, although you may need some time to rebuild your credit. With a Chapter 7 bankruptcy, you’ll need to wait up to 2 years before applying for a VA loan.
The biggest difference between a Chapter 7 and Chapter 13 filing is what happens to your assets and property when you file, and how long you must wait afterward to apply for a mortgage loan.
Chapter 7 Bankruptcy
In Chapter 7 bankruptcy, individuals (or businesses) are allowed to sell their property to pay off their debts. Once the sale of assets is final, the remaining debts are discharged, allowing debtors (the individuals filing bankruptcy) to start over with a clean financial slate. Chapter 7 comes with several drawbacks, however, including:
- You won’t be allowed to keep property like your home, your car and even some household items.
- You won’t be allowed to catch up on missed payments to settle debts with lenders and creditors.
Chapter 13 Bankruptcy
Chapter 13 is known as “reorganization bankruptcy” because it lets you work out a repayment plan to keep your property. A bankruptcy attorney will work with the court on a debt repayment plan typically lasting 3 – 5 years. Once the debt repayment plan is complete, any remaining debt will be discharged.
If you don’t meet Chapter 7 eligibility requirements and are able to pay some of your debt, Chapter 13 is often a better option. You’re able to retain your property, and the bankruptcy falls off your credit report in 7 years. That said, filing Chapter 13 bankruptcy has a few downsides worth noting. For example:
- You’ll find qualifying for new loans – including VA loan programs – much more difficult than if you hadn’t filed.
- You likely won’t be able to save money each month. That’s because you’ll have to use your income to pay for your necessities and any debt payments you’re required to make.
- You’ll have to make payments until your debts are paid in full.
Foreclosure
Foreclosure isn’t a type of bankruptcy, per se, but since homes are foreclosed upon due to non-payment, foreclosure can go hand-in-hand with filing bankruptcy.
A bankruptcy followed by a foreclosure (most common in a Chapter 7 filing) doesn’t disqualify borrowers from applying for a VA loan. A little bit more paperwork is involved, however, if a foreclosure was a part of any bankruptcy proceeding. Borrowers will need to document their personal circ*mstances in a letter of explanation.
If a borrower paid for a home with a VA loan and then went through foreclosure, they may not be able to use their full VA entitlement again. A discussion with the lender is always advised during the mortgage application process if you have any bankruptcy filings in your credit history.
