Get Back on Your Feet with a VA Loan After Chapter 7 Bankruptcy

Filing for Chapter 7 bankruptcy can feel like hitting rock bottom financially. While it wipes your slate clean, it also crushes your credit score making it tough to qualify for loans afterward. But if you’re a veteran or active-duty military, there’s a bright light ahead – the possibility of a VA loan.

VA loans offer eligible borrowers more flexible credit guidelines lower rates and require no down payment. This makes them an excellent option for rebuilding your financial life after bankruptcy.

In this article, I’ll explain how Chapter 7 bankruptcy works, VA loan requirements after bankruptcy, and steps you can take to set yourself up for success when you’re ready to apply.

How Chapter 7 Bankruptcy Works

Chapter 7 bankruptcy liquidates your assets to pay off creditors. The court appoints a trustee who reviews your finances, sells assets like cars, real estate, etc. and distributes the proceeds to creditors.

Once this is complete, your remaining debts are discharged. While this gives you a fresh start, it also means:

• Your credit score plummets by 130-240 points
• You lose collateral like your house or car
• You can’t negotiate with creditors to catch up payments
• The bankruptcy stays on your report for 10 years

After your debts are discharged through Chapter 7 bankruptcy, most lenders require you to wait 2 years before approving you for a new mortgage loan. But VA loans only make you wait 2 years from the discharge date.

VA Loan Requirements After Chapter 7 Bankruptcy

The VA has more lenient requirements than conventional loans or FHA mortgages after bankruptcy. Here are some key criteria to qualify:

• 2 year waiting period. You must wait 2 years after your discharge date to apply.
• Re-established credit. Lenders want to see you’ve responsibly rebuilt your credit.
• Minimum credit scores. Requirements vary by lender but tend to be around 620.
• Down payment not required. VA loans offer 100% financing.
• Meet VA eligibility. You must meet basic VA loan requirements.

Your lender will also want to verify:

• You have no late payments or new collections since bankruptcy.
• You have stable income and employment.
• Your bankruptcy was due to circumstances out of your control.
• You qualify based on your debt-to-income ratios.

Reaffirming debts like your mortgage or auto loan, maintaining payments, and keeping accounts current will help your case.

Tips to Improve Your Chances

Here are some tips to boost your odds of qualifying for a VA loan after Chapter 7 bankruptcy:

1. Rebuild your credit slowly. Get a secured credit card and make small purchases. Pay your balance off every month. Resist applying for too much new credit too quickly.

2. Save for a down payment. While not required, having 5-10% down shows financial responsibility.

3. Keep stable employment. Staying with the same employer demonstrates reliable income.

4. Live within your means. Keep expenses low and focus on paying down debts. Lower debt-to-income ratios help approval odds.

5. Obtain a copy of your bankruptcy discharge. Lenders will want to verify your discharge date.

6. Work with a VA-approved lender. Their expertise can prove invaluable for post-bankruptcy cases. Ask them to pre-approve you so you know where you stand.

7. Review your credit report. Make sure everything is accurate and work to fix errors.

8. Consider credit counseling. Reputable agencies can help you manage debt and money wisely going forward.

Providing a VA Loan Explanation Letter

For best results, provide your lender a written explanation of the circumstances that led to your bankruptcy. This gives important context and shows the situation was out of your control.

Be honest and take accountability for the factors you could control. Demonstrate why you’re now in a better position financially and how you’ve changed spending and money management habits.

The more proof you provide that your bankruptcy was a one-time event and you’re back on stable ground, the more confidence lenders will have approving you.

Is a VA Streamline Refinance Possible?

If you had a VA loan before your Chapter 7 bankruptcy, you may wonder if you can do a streamline refinance afterward. The short answer is yes, but you’ll likely need to wait the 2 year seasoning period.

With a streamline refinance, the VA doesn’t reassess your income or credit. They only look at your payment history on the existing VA mortgage.

As long as you remain current on your VA loan before and after bankruptcy, you may be able to streamline refinance for a lower rate once the 2 years has passed.

Sample VA Loan Timeline After Chapter 7

Here’s a sample timeline to give you an idea of what to expect when applying for a VA loan after bankruptcy:

January 2019 – John files Chapter 7 bankruptcy
March 2019 – John’s debts are discharged
March 2019 to March 2021 – John rebuilds credit, saves up, and gets finances in order
April 2021 – Two years after discharge, John talks to lenders and gets pre-approved
May 2021 – John finds a home and makes an offer
June 2021 – John closes on new home with VA financing

As you can see, it took John over two years from his bankruptcy discharge to close on a new home. While the waiting period stings, time flies. Stay focused on healing your finances and becoming an even stronger borrower.

You Can Bounce Back with a VA Mortgage

Chapter 7 bankruptcy makes buying a home difficult, but it’s not impossible. If you’re committed to rebuilding your credit and can wait out the two year seasoning period, a VA loan is a great option.

Their flexible credit guidelines offer military families a viable path back to homeownership after financial hardship. Be patient, stick to healthy money habits, and work closely with your lender. You can join the ranks of bankruptcy survivors who achieved their dreams of homeownership thanks to VA home loans.