Past bankruptcy and foreclosure can do serious damage to your credit profile. How much your score drops depends on a number of factors, but, according to FICO, often results in a 240-point drop from a bankruptcy and a 120 point hit from foreclosure. However, major credit setbacks like this do not automatically disqualify a homebuyer from using the VA Home Loan.
Credit history is certainly a highly important consideration for VA Loan eligibility, but borrowers with low credit scores, poor credit history and even bankruptcy can still gain approval for a VA loan.
With a Chapter 7, the VA requires that an individual must wait no less than two years from the discharge date of the bankruptcy before qualifying for loan approval. Additionally, the individual must provide a full explanation of the Chapter 7 bankruptcy and have re-established good credit. Proof of job stability will also be necessary for approval.
With a Chapter 13 bankruptcy, the guidelines vary slightly. An individual may still receive approval for a VA loan even while still paying on their Chapter 13 bankruptcy. The borrower simply must have made their payments on time for at least one year. In order to verify this, the court trustee must give written approval before the loan can be approved. Like the Chapter 7 bankruptcy, a full explanation of the bankruptcy is required in addition to re-establishing good credit and proving job stability.
Potential homebuyers still amidst that one to two-year timeframe should prepare themselves by staying current on all bills; any late payments could derail progress. Additionally, it is best to review your credit report, checking for inaccuracies and disputing when necessary. Potential homebuyers should also beware of credit repair services. Many credit repair services promise to help you repair your credit, but don’t follow through. If you decide to use a service, investigate the service thoroughly.
Although a bankruptcy can feel devastating, it doesn’t have to derail your dreams of homeownership. If you are committed to rebuilding your credit profile and meeting financial obligations, the VA Home Loan may be the home financing vehicle for you.