Understanding VA Loan Qualifications after foreclosure of a previous mortgage involves a combination of VA guidelines and individual lender underwriting requirements.
The VA Home Loan Guaranty Program’s qualifying guidelines are very clear when it comes to a borrower with foreclosure history. Since repayment practices on past debts are the best indicators for willingness to pay future debts, a prior foreclosure can prevent someone from qualifying for a veterans’ mortgage. However, a foreclosure does not make it impossible to qualify.
The U.S. Department of Veterans Affairs provides for a two-year recovery period from the date of foreclosure during which the veteran is not eligible. VA-approved lenders have the flexibility to require a longer waiting period. Thereafter, it is possible to qualify, however a borrower with a foreclosure in their past may have to answer more questions on the mortgage application when it comes time to borrow again. VA-approved lenders have authority to establish higher standards for approval.
In short, when a non-VA mortgage is foreclosed or a deed is given in lieu of foreclosure, then the veteran would not be eligible for a VA-backed mortgage for at least two years, maybe more if the lender requires. A borrower can use the waiting period to reestablish credit and show willingness and ability to pay future obligations.
VA mortgage foreclosure requires 2-year wait and repayment of government loss
If the foreclosure involved a VA loan, then not only must the borrower wait two years and repair credit before reapplying, but entitlement is affected as well. In order for a VA borrower to have full entitlement restored after foreclosure, he or she must repay the loss (the guarantied amount) suffered by the VA as a result of the foreclosure before being considered for another VA mortgage. If the entire amount of the loss is repaid, then the VA borrower may have full entitlement restored.
After the two-year period following foreclosure, a VA borrower may apply for a VA loan. However, if the loss from the previous VA loan foreclosure has not been repaid, then there may not be enough entitlement remaining to reap all the benefits the Program has to offer. In this situation the remaining entitlement may or may not be sufficient for a VA loan with zero money down. The following example shows how a foreclosure on a VA loan and failure by the defaulting veteran to repay the loss can hurt a veteran’s entitlement for a future purchase using the VA Loan Guaranty Program:
VA home loan entitlement cannot be restored until loss is repaid
A veteran has used $36,000 of his basic entitlement on a VA home loan that was foreclosed. The loss was not repaid. It’s been two years since foreclosure and the borrower would like to purchase another home using the Program. The loan amount will be $340,000 where the county limit is $417,000.
$417,000 x 25% = $104,250 maximum guaranty with full entitlement
$104,250 - $36,000 (not restored) = $68,250 entitlement available
$68,250/ $340,000 = 20.07% is all the VA Guaranty could be on this loan
Since VA’s Guaranty will be less than 25%, a down payment will likely be required to meet lender requirements.
A foreclosure in and of itself does not disqualify someone from the VA Home Loan Program, but it can make the application process longer. A borrower may have some entitlement not restored due to VA loan foreclosure, yet still have partial entitlement remaining for another loan. In this case, a VA loan following foreclosure using partial entitlement is possible. VA-approved lenders may establish their own requirements in addition to the VA program requirements. Of course, a borrower would have to meet lender income and credit qualifying requirements.
Lenders will typically require borrowers with foreclosures in their histories to explain their foreclosure pasts. In addition to credit and income qualifications, the applicant with a foreclosure history may be asked to provide information on the circumstances surrounding the foreclosure. Lenders may consider some circumstances more extenuating than others. Circumstance beyond a borrower’s control might include:
- loss of income due to unemployment
- prolonged strikes
- medical bills that are not covered by insurance
Things lenders typically do not consider beyond someone’s control might include:
- Bankruptcy due to failed business of a self-employed applicant
Of course, VA-approved lenders consider each borrower’s circumstances unique. To learn more about qualifying for a VA loan after foreclosure, please contact a VA loan specialist from a VA-approved lender.
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