How Long of a Wait Is There for a VA Loan After Foreclosure?

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It can take a long time for the reality of a foreclosure to sink in, but its effect on credit is immediate. In addition to the loss of the borrower's home, the black mark on his credit score remains as a seven-year reminder to the borrower and future lenders that the borrower previously defaulted on a loan. Foreclosure typically disqualifies a borrower from obtaining a Veterans Affairs mortgage for at least two years.

Foreclosure Effects

Foreclosure happens when a bank repossesses and sells a home because the borrower fails to make his mortgage payments. It knocks about 100 points off the borrower's credit score. In a mortgage market where applicants are expected to have a minimum credit score of 500 for a Federal Housing Administration loan or higher for a conventional loan, foreclosure can devastate your ability to get a VA loan, too. VA loans are available to veterans, active service military personnel and military spouses who qualify for a Certificate of Eligibility.

VA Loans

VA borrowers can purchase with zero down payment and no mortgage insurance premiums. The VA is not a mortgage lender. Private lenders offer the loans and handle the application process. The VA acts as insurer by covering some of the losses the lender incurs as a result of borrower default and does not set a minimum credit score requirement. VA lenders take a comparatively relaxed approach to credit requirements, however, that's not to say a borrower with poor credit is guaranteed to qualify. For example, many lenders, such as Veterans United Home Loans, expect a minimum credit score of 620.

Foreclosure Seasoning

Lenders do not offer VA loans to previously foreclosed homeowners for two full years after their foreclosure. After that, the applicant's credit history is scrutinized to assess his ability to repay the loan. A borrower with a history of foreclosure has a greater chance of securing a VA loan if the foreclosure was due to circumstances beyond his immediate control, such as unexpected job loss or medical bills.

Additional Restrictions

Additional restrictions apply if the borrower's foreclosed home was financed with a VA loan. The VA lends up to a quarter of the loan amount. This insurance promise is known as entitlement. When a VA-mortgaged home is foreclosed, the borrower loses all or part of his entitlement. Lenders can only approve his second VA loan application to the balance of the borrower's remaining entitlement. In addition to waiting two years and presenting a rehabilitated credit score, the borrower must either pay the lost entitlement back to the VA, come up with a down payment or accept that he qualifies for a substantially reduced loan.