Loans insured by the U.S. Department of Veterans Affairs -- known as VA loans -- are commonly used by active members and veterans of the U.S. military, National Guard and Army Reserve because they don't require down payments. Members and veterans of the U.S. military can qualify for VA home loans even with bankruptcies in their past. They will, though, have to submit to a waiting period and rebuild their credit scores.
The Basics of VA Loans
VA loans are not originated by the U.S. Department of Veterans Affairs, but they are insured by them. This means that the private lenders who actually do originate these loans take on less risk; they know that the federal government guarantees that they'll be paid back even if borrowers eventually default on their VA loans. Because of this, private lenders -- though their exact guidelines vary -- will not require that their VA borrowers boast credit scores quite as high as the ones held by borrowers applying for conventional home loans. This is a critical difference when it comes to bankruptcies, because no financial miscue drags down credit scores quite like bankruptcies.
The Bankruptcy Damage
Fair Isaac, the company that developed the FICO credit score, says that a bankruptcy can lower a borrower's credit score by 130 to 240 points. That's worse than the damage caused by a housing foreclosure, which will only cause your FICO score to fall by 85 to 160 points. And bankruptcies don't simply disappear. A Chapter 13 bankruptcy -- in which you agree to pay back at least some of the debts that you owe -- will remain on your credit report for seven years. A Chapter 7 bankruptcy filing -- in which your debts are forgiven -- will remain on your credit report for 10 years.
You Can Recover
You can rebuild your credit score after bankruptcy by paying all your bills on time and paying off as much of your credit card debt as possible. You'll generally need a FICO score of at least 620 for a VA loan. How long it takes to rebuild your score varies according to a host of factors, including how low your score fell after a bankruptcy.
Patience is Key
Most lenders originating VA loans will require borrowers to wait at least two years after the discharge of a Chapter 7 bankruptcy to apply for a VA-insured loan. Lenders typically will require that borrowers wait at least one year after the discharge of a Chapter 13 bankruptcy. There are significantly longer waiting periods for some prospective borrowers seeking non-VA loans.
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