How to Get Approved for a VA Loan After Foreclosure

Going through a foreclosure can be an extremely difficult and stressful experience. It damages your credit, impacts your finances, and often results in losing your home.

However, a foreclosure does not have to permanently destroy your chances of homeownership. If you previously had a VA loan, you may still be able to qualify for another VA loan in the future.

In this comprehensive guide, we’ll explain everything you need to know about getting approved for a VA loan after a foreclosure.

Overview of VA Loans

Before diving into the specifics of getting a VA loan after foreclosure, let’s quickly review what VA loans are and how they work.

• VA loans are mortgage loans guaranteed by the Department of Veterans Affairs. This allows eligible borrowers to get a home loan without requiring a down payment or private mortgage insurance (PMI).

• Instead of a down payment, you use your VA entitlement, which is based on your service. This entitlement guarantees part of the loan amount for the lender.

• VA loans offer significant advantages like lower interest rates and more flexible credit requirements compared to conventional loans.

• To be eligible, you generally must have at least 90 days of active duty service with an honorable discharge. There are also options if you’re still serving or in the National Guard/Reserves.

• VA loans can be used for purchases and refinances. The VA also provides streamlined refinance options to make refinancing simple.

Waiting Periods After VA Loan Foreclosure

If you lose a home to foreclosure on a VA loan, you’ll need to wait before applying for another VA loan. There are a few different waiting periods to be aware of:

• 2 years – The standard waiting period after a VA loan foreclosure is 2 years. Most lenders require you to wait this long before they will approve you for a new VA loan.

• 3-7 years – For other types of loans (FHA, USDA, conventional), typical waiting periods range from 3-7 years. VA loans offer more lenient requirements.

• Beyond 2 years – Some lenders may make you wait longer than 2 years. It depends on their specific policies. The VA itself only requires 2 years but lenders can set stricter standards.

• 1 year – In certain cases, such as a financial hardship, lenders may approve you in less than 2 years. This is determined on a case-by-case basis depending on your situation.

So in most cases, you can expect to wait around 2 years after a VA loan foreclosure to get approved for another VA loan. The main factor is meeting the lender’s requirements, which we’ll discuss next.

Lender Requirements After Foreclosure

While the 2 year waiting period is important, meeting the lender’s other requirements is the bigger challenge. Here are some of the key requirements lenders look for:

• Improved credit – Even a foreclosure over 2 years ago will seriously hurt your credit score. Lenders want to see that you’ve taken steps to rebuild your credit. Having at least 620 FICO is recommended but some may approve credit scores in the 500s.

• Stable income – Provide recent pay stubs and tax returns to verify your income is steady. Any gaps in employment may raise concerns so be prepared to explain.

• Manageable debts – Lenders will review your full debt picture, including credit cards, auto loans, student loans, and other obligations. Keep debts low and avoid new accounts in the 1-2 years before applying.

• Sufficient cash reserves – Expect to have 6-12 months of mortgage payments available in savings as a financial cushion. Lenders want to see reserves in case of another financial hardship.

• On-time payments – Make all payments for credit cards, auto loans, utilities, rent, etc. on time consistently. No late payments for at least 12-24 months.

Meeting all of these standards demonstrates to lenders that you’re financially stable and ready to be a homeowner again. It’s not easy rebuilding your profile after a foreclosure but taking the right steps will set you up for success.

How to Improve Your Chances

Here are some proactive steps you can take to improve your chances of approval for a VA loan after foreclosure:

• Start rebuilding credit right away – Get secured cards, become an authorized user, dispute errors, etc. Responsibly managing new accounts helps build your scores.

• Pay all bills on time – Set up autopay if needed. Delinquent payments after the foreclosure signal high risk to lenders.

• Keep debts low – Reduce balances on credit cards and other debts over time. High balances may disqualify you.

• Save for a down payment – Even though VA loans don’t require a down payment, having funds available improves your chances.

• Avoid applying for new credit before applying – New accounts hurt your scores. Apply for a VA loan first, then open new credit if needed.

• Get pre-approved – Going through pre-approval helps identify any issues upfront and shows lenders you’re serious.

• Ask lenders about exceptions – See if lenders will make any exceptions to their requirements based on your circumstances.

• Consider loan modifications first – If facing financial hardship, ask about modifying your loan before defaulting. This can prevent foreclosure.

With a strategic approach, proactive preparation, and perseverance, you can position yourself to get approved for another VA loan. It takes time and diligent effort but homeowners have rebuilt after foreclosure and purchased again.

Request an Updated COE

An important step when applying for a new VA loan after foreclosure is requesting an updated Certificate of Eligibility (COE) from the VA.

Your COE verifies your entitlement and is required to confirm you still have VA home loan eligibility. Here’s what you need to know:

• The COE shows your available entitlement amount. This determines how much VA backing you have for a new loan.

• Any used entitlement is restored after 6 years from closing on the foreclosed loan.

• You can request a new COE through any lender once the waiting period has passed.

• If you have no entitlement left, you may need to make a down payment or apply with a co-borrower to get approved.

• Regaining lost entitlement after foreclosure requires repaying the VA in full for the guarantee claim they covered.

Check your remaining entitlement well before starting the application process. This allows time to save for a down payment if needed based on your available entitlement.

Refinancing vs Purchase After Foreclosure

After meeting the waiting period and lender requirements following a foreclosure, you have two main options for getting a new VA loan:

VA Refinance

• Refinancing lets you take out a new VA loan secured by a property you already own.

• This requires having enough home equity to qualify for the refinance.

• VA streamline refinances allow you to refinance with limited documents, credit requirements, etc.

• Refinancing is typically faster and easier than purchasing right after foreclosure.

VA Purchase

• Purchasing a home with a new VA loan may be challenging immediately after foreclosure.

• You’ll need to meet stricter credit, income, and asset requirements to qualify.

• Lenders may want you to wait longer than 2 years before they’re comfortable approving a purchase.

• If buying right after foreclosure, look for less competitive markets and lower-priced homes.

For most borrowers, refinancing is the quickest path to a new VA loan after foreclosure. But purchasing is possible if you position yourself well. Discuss your specific goals and circumstances with a lender.

Alternatives to Foreclosure

If you find yourself struggling to make payments and facing potential foreclosure, be sure to exhaust all alternatives first before letting the home go to foreclosure. Some options to consider include:

• Loan modification – Your lender may modify the loan terms to make payments more affordable. This involves changing the rate, term length, or balance.

• Repayment plan – Set up a structured plan with set payments over time to become current on the loan.

• Forbearance – Your lender may temporarily reduce or suspend payments for a defined period due to financial hardship.

• Short sale – Sell the home and the lender accepts less than the full balance owed. Much better for your credit than foreclosure.

• Deed-in-lieu of foreclosure – You voluntarily transfer ownership of the property back to the lender instead of going through foreclosure.

Pursuing alternatives takes time and effort but prevents foreclosure. If you’re struggling, immediately contact your lender and the VA’s foreclosure assistance program. Avoid letting the situation worsen without seeking support.

Final Thoughts

Recovering from a VA loan foreclosure is difficult but absolutely possible with time and dedication. Follow the guidance above to rebuild your profile and properly position yourself for approval.

Be sure to work with an experienced VA lender who can guide you through the process. With persistence and prudent financial management, you can purchase