Getting a VA Loan After Foreclosure

Going through a foreclosure can devastate your credit score; according to credit scoring firm FICO, consumers can see their scores plummet by as many as 160 points.

It can take years for a VA loan borrower's credit profile to recover fully, but it doesn't mean you have to wait years to buy another home. The VA loan's more flexible credit requirements allow qualified Veterans to bounce back significantly faster after foreclosure than buyers seeking conventional financing.

Today we’ll walk you through the steps of getting a VA loan after foreclosure. We’ll also define the different types of foreclosure and provide resources that can help you avoid foreclosure before it’s too late.

Essentially, foreclosure is a legal process where the lender seizes their collateral after a buyer has failed to make their mortgage payments. Lenders will then resell the property to a new buyer to recoup their investment. In some cases, a foreclosure procedure involves going to court, while others don't require a judge's involvement.

Deed-in-Lieu of Foreclosure and Short Sales

Rather than go through the time and money it takes to foreclose in court, some lenders offer alternatives to foreclosure, such as a deed-in-lieu of foreclosure or a short sale.

• A deed-in-lieu of foreclosure occurs when a homeowner willingly transfers ownership of the property back to the lender in exchange for being released from their mortgage obligations.
• A short sale is when a lender allows you to sell the home for less than you owe.

A deed-in-lieu of foreclosure and short sale are usually seen as preferable to a full foreclosure, as both forgive a borrower’s payment delinquency and outstanding debt without making them experience stressful court proceedings.

While deed-in-lieu and short sale are considered favorable compared to a full foreclosure, these foreclosure events still seriously damage your credit profile. Each of these carry a required waiting period before you can apply for a new loan, which you might also hear referred to as a "seasoning period."

Steps to Getting a VA Loan After Foreclosure

1. VA Loan Foreclosure Waiting Period

Generally, Veterans must wait two years after a foreclosure event to reapply for a VA loan. This period is a mandatory cooling-off phase to ensure that the borrower has regained financial stability.

While two years may sound like a long time, it’s better than some alternatives. Many borrowers who default on a conventional loan have to wait up to seven years before they can consider reapplying.

Note that individual lenders might have more stringent requirements and longer waiting periods.

2. Request a New COE

Before applying for another VA loan, you'll need an updated Certificate of Eligibility (COE). Your COE is a document provided by the VA, confirming to lenders that you've fulfilled the service criteria to qualify for a VA home loan. This certificate includes your VA entitlement value and whether or not you’re exempt from paying the VA funding fee. When the time comes, lenders will consult a borrower's Certificate of Eligibility to help determine how much entitlement is remaining.

Borrowers who've lost a VA loan to foreclosure will have reduced VA loan entitlement, which will limit how much they can borrow on their new loan without making a down payment. VA loan entitlement cannot be regained after foreclosure without repaying the VA in full. The good news is that many borrowers are able to purchase again using their second-tier entitlement.

3. Apply for a New VA Loan

Once the waiting period has passed and you have updated your COE, you can apply for a new VA loan. Ensure that you meet all of the lender's requirements, which will likely include demonstrating improved credit, stable employment, and sufficient income.

Challenges to Getting a VA Loan After Foreclosure

Defaulting on an FHA Loan

Things can be more difficult for prospective borrowers who've lost an FHA loan to foreclosure. Homebuyers who default on FHA loans may need to wait three years before being able to close on a VA home loan.

Loan Modification

Homeowners who've obtained a loan modification to avoid default may also encounter a two-year waiting period before being able to close on a new VA loan. Guidelines can vary by lender.

Foreclosure after Bankruptcy

Bankruptcy can also affect your eligibility for a VA loan. Generally, borrowers who've filed for Chapter 7 bankruptcy must wait two years from the discharge date before applying for a VA loan. For Chapter 13 bankruptcy, Veterans are typically eligible after showing improved credit and completing a debt repayment plan.

Foreclosure Assistance For Veterans

If you're a Veteran facing potential foreclosure, you're not alone. The VA offers a Foreclosure Assistance program which pairs Veterans and service members with a VA Loan Technician who can help them with risk mitigation. These might include:

• Loan Modifications that involve lowering the interest rate, extending the loan term, or possibly even reducing the principal balance. The goal is to make monthly payments more affordable for the borrower.
• Special Forbearance provides temporary relief from mortgage payments. The lender agrees to either reduce or suspend your monthly payments for a specified period. After this period, you'll work with the lender to determine a plan for repaying the missed amounts. This is often used when the borrower has a short-term hardship, such as a medical emergency or temporary job loss.
• Repayment Plans set up a fixed schedule to repay the past due amounts. This could mean paying a portion of the overdue amount in addition to your regular monthly mortgage payment. The objective is to bring the mortgage current over a set period, typically several months.

You should also be aware that your lender may offer foreclosure forgiveness due to extenuating circumstances such as serious illness or the death of a wage-earning spouse. If you believe you may qualify for hardship-related forgiveness, consult with your lender as soon as possible.

Proactive communication with your lender makes a significant difference. Foreclosure can be costly and time-consuming, so VA lenders are typically willing to work with you. Engaging early and exploring these alternatives can prevent financial distress and help maintain homeownership.