VA Loan Reader Question: Eligibility After Foreclosure

A reader asks, “I am a vet who walked away from my home in 2009 (a BAC-mortgaged property). The foreclosure went down on April 1st, 2011. I have been renting since October 2009”

“For VA purposes, my 24-month waiting period will be up April 1st of this coming year. I’d like to get back into an affordable and simple home as soon as possible. Not sure if I have to wait until April 1st, or if I have to, is there anything I can do now to look more attractive in the eyes of the lender?”

Let’s take a look at what the Department of Veterans Affairs says about foreclosures and how they can affect the borrower’s chances for a new VA mortgage. The following is from Chapter Four of the VA Lender’s Handbook and are instructions to the lender:

“The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.

• Develop complete information on the facts and circumstances of the foreclosure.
• Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law.  See the preceding heading entitled “Bankruptcy.”

Looking under the Bankruptcy section (as directed in the last line above) for information on how to proceed, you’ll find the following instructions to the lender. Remember to insert the word “foreclosure” in place of the word “bankruptcy” to get the official VA position on this issue:

“You may disregard a bankruptcy discharged more than 2 years ago.

If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:

• The applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and
• The bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.”

One very important thing to remember–the VA minimum waiting periods are often exceeded by the individual lender. Just because the VA loan rules say after two years a borrower is free to apply for a VA mortgage loan once again does not mean a lender might not require additional wait times. It’s common for lenders to require a three year wait rather than two.

Do you have questions about VA home loans? Ask us in the comments section.