You can certainly qualify for a VA loan after bankruptcy, often in a shorter waiting period than you would with a conventional loan.

A VA loan after bankruptcy is not a short or easy road. According to credit scoring firm FICO, a bankruptcy can cause your credit score to drop anywhere from 130 to 240 points. It can take three to 10 years for a consumer’s credit score to fully recover, and you may need to spend a good chunk of that time working to rebuild your credit.

The good news for VA borrowers is that the credit score hurdle is typically lower than what you’ll need for conventional or even FHA financing.

Lenders will usually have a “seasoning period” for borrowers who have experienced bankruptcy. A seasoning period is how much time you have to wait before being eligible to close on a home loan.

• Is it Hard to get a Loan after Filing Chapter 7?
• Looking for a Personal Loan After Bankruptcy
• How Long do you have to wait to get a Mortgage after Chapter 7?
• How does VA Home Loan Entitlement Restoration work?
• How to Apply for VA Restoration of Entitlement
• What can you do after Chapter 7?
• How to Recover After Filing for Bankruptcy
• What are some Things to Know About VA Loan Eligibility?

Is it Hard to get a Loan after Filing Chapter 7?

Going through a bankruptcy can be tough—and disheartening. Your credit can be impacted for seven to 10 years, making it difficult to get certain loans.

Read Also: Va Loan Multi-Family

The good news, though, is that you can still get a personal loan after bankruptcy. It might not be easy, and you might have to pay a higher interest rate, but it is possible. 

Here’s what you need to know about getting a personal loan after bankruptcy.

Different Types of Bankruptcy and Getting a Personal Loan

The type of bankruptcy you end up with can make a difference in how soon you’re able to get a personal loan. However, in most cases, you can apply (and you might even get) a personal loan shortly after you finish bankruptcy proceedings. There are two types of bankruptcy that can impact your ability to borrow:

• Chapter 7: This is sometimes referred to as a “fresh start.” Your debts are wiped out, although the court will likely liquidate some of your assets to meet a portion of your obligations. A Chapter 7 bankruptcy can remain on your credit report for up to 10 years.
• Chapter 13: Instead of wiping out your debts, you’re put on a court-ordered repayment plan, usually lasting between three and five years. With Chapter 13, the bankruptcy will drop off your credit report in seven years.

Either way, bankruptcy can have a huge impact on your credit score, and the higher your score before the bankruptcy, the more significant the drop. The more time that elapses since your bankruptcy, though, the more your score improves—and the more likely you are to succeed in your loan application. 

Following good habits after the bankruptcy can help you see improvement in your score, even with the bankruptcy still listed. You can apply for a personal loan anytime after the bankruptcy, but you have to be prepared to have your application denied, or to pay a higher interest rate. The length of time it takes to get the loan may vary, too. As a result, it might make sense to wait a year or two before seeking a loan.

Looking for a Personal Loan After Bankruptcy

As you get ready to apply for a personal loan after bankruptcy, here are some of the steps to follow:

• Check your credit reports: Get copies of your credit reports from AnnualCreditReport.com and make sure the information is accurate. After a Chapter 7 bankruptcy, your debts should be included and show a zero balance. Double-check that your Chapter 13 debt accounts are being properly reported, now that you’re paying as agreed.
• Prove your income: As you apply, you’ll need to prove your income. Pay stubs, W-2s, and other documents can show that you have sufficient income for the loan—even though you have a bankruptcy. Try to include side hustle or spousal income in the calculation, so lenders will view you as less risky.
• Prepare an explanation: You can prepare a letter explaining the circumstances that led to the bankruptcy and how you’re remedying the issue. If your bankruptcy was caused by medical costs or some other unforeseen issue, you might get a bit of a break.

Compare terms from a variety of lenders. Look online for the best personal loan providers and see what terms you’re offered. You might not qualify for the best rates, but you might still get something affordable. Compare online offers with what might be available at your bank or a local credit union.

Avoid High Rates and Fees

While you might have to pay higher rates when getting a personal loan after bankruptcy, there’s no reason to pay exorbitant rates. Watch out for payday lenders and others who advertise that they don’t do credit checks. While you might get a loan, the fees and interest might be so high that you end up back in the debt cycle.

You might be better off looking for alternatives to personal loans if you can’t qualify for a reasonable rate. Before you borrow, use the personal loan calculator below to try out different scenarios, including various rates and your credit score.

How Long do you have to Wait to get a Mortgage after Chapter 7?

In most cases, you’ll need to wait two years from the date of your Chapter 7 bankruptcy discharge before you’ll qualify for this loan. Keep in mind that a discharge date isn’t the same as the filing date. The court sends out the bankruptcy discharge paperwork just before your case closes.

• Credit score requirement when you’ve opened new accounts. Meeting credit requirements won’t be as much of a hurdle as you might think. If you open new credit accounts after your bankruptcy, you’ll need to show that you’ve established a good credit history by paying your payments on time.
• How to avoid the credit score requirement. FHA has another rule—you can qualify by choosing not to open any credit accounts after bankruptcy.
• Speeding up the process using the 12-month exception. At times, people file for bankruptcy due to no fault of their own. If you fit into this category and can demonstrate that filing for bankruptcy was beyond your control, you might be able to reduce the waiting period to twelve months. Additionally, you’ll need to show that you’ve handled your financial affairs responsibly after the bankruptcy.

After You’ve Filed for Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy is a three- to five-year process—but that doesn’t mean that you can’t buy a house during that time. You can obtain an FHA loan before you complete your plan if you meet the following conditions:

• You’ve paid 12 months of plan payments.
• The court approves your request to purchase a house with an FHA loan.
• You can demonstrate that the reason you filed for bankruptcy is unlikely to occur again.

Keep in mind that the court might not be on board if you’d have to reduce the amount paid to your creditors in your plan to qualify for a home loan. And if you have to present the terms of the house purchase in your motion (the legal procedure you’ll use to make your request), you might have a hard time closing the deal. Many sellers would be unwilling to take their house on the market on the chance that you’ll obtain the necessary court approval.

If you’re considering this option, you should consult with a knowledgeable bankruptcy attorney before filing. A lawyer can advise you about the feasibility of a future loan qualification and, if possible, assist you by putting together a repayment plan that will help you reach your goal.

How does VA Home Loan Entitlement Restoration work?

VA entitlement is a financial guaranty from the government, which pledges to repay a portion of your home mortgage in the event of default.

Your VA entitlement is a specific dollar amount. Veterans and service members using the VA loan benefit for the first time have their full VA loan entitlement available, which allows qualified buyers to borrow as much as they can afford without having to make a down payment.

But borrowers who have utilized a VA home loan before may have some or none of their entitlement remaining when the time comes for them to seek another VA purchase. And this means a borrower may have to apply for a restoration of entitlement prior to getting a new loan.

A VA restoration of entitlement allows borrowers who have previously utilized their VA loan entitlement to purchase another home with the VA’s guaranty again.

VA Entitlement Restoration

Veterans can restore previously used VA entitlement by:

• Selling the original property, repaying their current VA loan in full and disposing of the home
• Allowing a qualified Veteran to assume their current loan and substitute their entitlement for theirs
• Refinancing their existing VA loan into a non-VA product and invoking what’s known as the “one-time restoration of entitlement”

Let’s take a closer look at those three paths.

Selling to Restore VA Loan Entitlement

This is the easiest and most common path to entitlement restoration.

There are two big keys to this path. First, you need to sell the home and be able to repay your VA loan balance in full. Selling your home for less than you owe (known as a short sale) requires permission from your loan servicer and results in the loss of whatever entitlement you used to acquire the property.

The second piece is disposing of the property, which is a given when selling or having another Veteran assume your loan. But it’s an important part of entitlement restoration, as you’ll see when we look at refinance next.

Refinancing to Restore VA Loan Entitlement

Restoration looks different when we talk about refinance. The big reason why is that you aren’t disposing of the property when you refinance.

A VA homeowner can refinance into a non-VA loan (conventional, FHA, USDA) and pay off their original VA loan in full. But because you’re holding onto the property instead of handing it over to a new buyer, entitlement restoration options get narrower. Otherwise, VA buyers could potentially purchase home after home, refinancing each new VA loan and fully restoring their entitlement each time.

The VA loan program is meant to help veterans purchase primary residences they live in full time, rather than amass a bunch of investment properties.

To that end, the VA allows veterans a one-time opportunity to refinance their loan, keep their home and fully restore their entitlement.

How to Apply for VA Restoration of Entitlement

Some borrowers who have previously purchased a home with a VA loan will have no entitlement remaining or their COE will say, “Paid in full, no restoration.” This means their previous loan was paid off, but the VA lacks information as to how or if the property was disposed.

In order to update the COE to reflect current information, borrowers should fill out VA form 26-1880, focusing on Section 10 – Previous VA Loans. A VA-approved lender like Veterans United Home Loans can also help veterans take care of this.

Oftentimes the VA will want to see a copy of the final closing documents from the sale of the home, so it is important keep all paperwork received from the title company at closing. Restoration of entitlement is not an automatic process. It requires an application from the borrower.

Once an application has been processed and entitlement restored, borrowers can then move forward with the process of applying for a new VA home loan, generally following the same guidelines as the previous loan.

One-Time Restoration of Entitlement

VA entitlement may also be restored one time only if the Veteran has repaid the prior VA loan in full, but has not disposed of the property purchased with the prior VA loan.

This one-time exception to the “must-sell” mandate gives the borrower an opportunity to keep the first home and seek a new VA loan for another home.

Borrowers who choose to utilize the “one-time restoration” allowance will have to dispose of all property in the future if they again seek restoration of entitlement.

There are no rules concerning the disposition of the first property once the loan has been paid in full, leaving it to be served as a rental property or vacation home without penalties or restrictions from the VA.

However, the new property purchased with the VA loan is still under department regulations involving occupancy, business use of the space and marketability, among other issues.

What can you do after Chapter 7?

What does life after bankruptcy look like? When you’re considering this move, it’s important to look ahead before you decide your next steps.

People can find themselves at a point where there is no chance they will be able to pay off the debts they have accumulated. For example, consider someone who has depleted all their savings and maxed out all of their credit cards due to medical problems and losing their job.

Even with unemployment or a temp job, they might find that they can no longer make even the minimum monthly payments on their cards or keep up with their rent and car loan. That’s when a helpful option is talking to a bankruptcy attorney. Chapter 7 could turn out to be the logical next move.

Unfortunately, this situation is all too common—in fact, Mark Twain, Walt Disney, Elton John, and Henry Ford all filed for bankruptcy at some point in their lives. If you think bankruptcy could be looming for you as well, read on to discover what you can expect and what to watch out for after filing for personal bankruptcy.

You’ve Filed, Now What?

For individuals who have declared bankruptcy, the recovery process is long and difficult. The first step comes when you and your court-appointed bankruptcy trustee meet with your creditors to inform them of the bankruptcy, at which time any nonexempt assets that you have must be liquidated.

You will be allowed to keep your furniture, car, and personal belongings up to a certain value, but any nonexempt liquid assets, such as cash or certificates of deposit (CDs), must be turned over to your trustee. However, liquidating your assets is only the first of many issues that must be dealt with as the consequences of your bankruptcy unfold.

Getting a loan of any kind will be extremely difficult for the next couple of years. It may be possible to regain a better credit score and qualify for some types of loans after only a year, but the lenders that will take you on will probably be from finance companies that charge exorbitant rates of interest. In some cases it may not be possible to get credit at all for major purchases, such as a car or home.

A Chapter 7 bankruptcy will remain on your credit report for 10 years. If you file a Chapter 13 bankruptcy instead, the bankruptcy should disappear from your credit report after only seven years. With Chapter 7 your trustee uses the liquidated assets to pay off as much of your debt as possible, after which the rest is discharged.

Chapter 13 requires that you pay back all of your debt within three to five years according to a set payment plan that must be approved by the court. If you are in a position to put forward a credible plan, Chapter 13 is often preferable, because it allows you to save your home from foreclosure.

Ultimately, there are six types of bankruptcy filings. To choose the one that best suits your financial position, it is advisable to consult with a lawyer.

How to Recover After Filing for Bankruptcy

Here are a few steps that you can take to help regain control of your situation.

1. Maintain a job and a home

It is vitally important that you get—and keep—a job as soon as possible if you don’t have one already. Finding a good place to live ranks a close second, if this is an issue. Stable residential and employment histories are necessary because they show creditors that you are reliable.

A growing number of landlords are checking credit references as a means of screening out possible unreliable tenants. If you are not able to rent an apartment, you may have to room with a friend or relative until your credit improves.

Employers may also request credit scores and histories of their potential applicants as a measure of personal responsibility. A spell of bad luck can fuel a vicious cycle that may prevent you from getting a job that pays enough for you to pay off your debts. Do what you can to push forward anyway and find a job that can be the foundation of putting the bankruptcy behind you.

2. Pay your bills

It is imperative that you stay current on all of your monthly bills and other payments so that your post-bankruptcy credit record stays clean. There is absolutely no room for even the tiniest amount of backsliding in this regard. This means that you must be extremely watchful of every expenditure so that your expenses don’t build beyond what you can afford to cover.

3. Keep a bank balance

Opening and maintaining a checking and/or savings account is also necessary. Having a history of charged-off bank accounts could hinder your ability to open a new checking account.

The good news is that many banks offer second-chance programs for people in this situation. Keeping a positive balance in all accounts at all times will show employers and creditors that you now have a reliable cash flow.

4. Start to rebuild your credit

During bankruptcy it’s important to start to build up what got torn down. To rebuild your credit you may need to obtain a credit card. Using it wisely will demonstrate to lenders that you can manage your money and are determined to slowly rebuild your flawed credit history.

If you find yourself racking up debt again, you should stop using your card immediately and start a repayment plan. If necessary, use a debit card or prepaid credit card until you can pay off your regular card. Keep in mind that the interest rate on any card for which you are eligible will likely be higher than on the average credit card.

5. Find help for car loans and mortgages

When the time comes to buy something larger with debt, such as a car or house, you may need to have another party, such as your parents, cosign the loan.

Without this, you may not be able to obtain financing at all. With it, you may be able to get something resembling decent terms on your loan, depending on the credit score of the cosigner. If credit is not available, you may simply have to wait until you can pay for a car with cash or consider a personal loan from your relatives and/or friends.

Also, an issue if you’re buying a car: After declaring bankruptcy, you may find that insurance companies are reluctant or unwilling to ensure you. If your past credit history puts you in what insurers consider a high-risk pool, there are companies that will provide car insurance for you—charging more, but you still need it to drive.

What are some Things to Know About VA Loan Eligibility?

A VA loan can be a great way to finance a home. The government-backed mortgage program has several unique features that save borrowers cash both up front and each month. In fact, it’s one of the few programs available that allows for 100% loan to value (LTV), meaning you may be able to finance the full loan amount. Even better? Private mortgage insurance (PMI) is never required – even when you put zero down.

Here are 10 facts about VA loan eligibility that will help you determine your own eligibility.

1. VA Loan Eligibility is Earned

Most service members are told that they will be eligible for a VA loan if they stay in long enough. Generally, service requirements are as follows:

• 2 years for regular service members
• 6 years for Reservists and National Guard members
• 90 days active duty during wartime
• 181 days active duty during peacetime

Are You Eligible for Home Loan Benefits?

If you’re not sure if you meet these requirements, don’t worry! You may still be eligible for a VA loan.

2. Seven Uniformed Services Have VA Home Loan Benefits

When most people think of VA loan eligibility, several military branches may come to mind. But did you know there are seven uniformed branches that have home loan benefits? These include:

• Army
• Navy
• Air Force
• Marines
• Coast Guard
• National Oceanic Atmospheric Administration (NOAA)
• Public Health Service (USPHS)

For commissioned officers of NOAA and the USPHS, you may have access to VA loans. Please check the VA website for more information.

3. Reserve/National Guard Members Can Earn Eligibility Too

Weekend warriors are also eligible for VA loans. If you are currently serving your country in the Reserve or National Guard, you are eligible for this great benefit after 6 years of service. No longer active duty? Not necessarily a problem.

During the Iraq War a great number of Reservists were deployed to active duty. If you were, you could be eligible under active duty wartime (90 days or period ordered) rules.  Here’s how the Reserve and Guard members can typically earn eligibility:

• Six Years of Service, and
  • Discharged honorably, or
  • Placed on retired list, or
  • Transferred to Standby or Ready Reserve after honorable service, or
  • Continue to serve in Selected Reserve

Again, be sure to check the VA website for more information.

4. You Can Earn Benefits Faster by Serving on Active Duty

If you’re on active duty, or called up for active duty service, you may be on the fast track to earning your home loan benefits. (Requirements vary for periods.) Here is a summary of active duty requirements:

• 90 continuous days for active duty service members
• 90 days of active service for current Guard and Reserve service members
• 90 total days for wartime Veterans until 05/07/1975
• 181 continuous days for peacetime Veterans until 09/07/1980 (10/16/1981 for officers)
• At least 181 days or full call for peacetime Veterans 09/08/1980 – 08/01/1990 (10/17/1981 beginning date for officers)
• At least 90 days or full call for Gulf War Veterans 08/02/1990 – present

Determining your own eligibility can seem complicated. If you need help, contact a lender that specializes in serving veterans.

5. Surviving Spouses Can Earn Eligibility

Spouses play an active role not only in the decisions of their husbands, wives, or partners, but also in decisions that affect the military. And while not serving alongside their spouses, their sacrifice for the greater good can lead to uncertainty and stress – including the unimaginable.

In the past, surviving spouses could only be eligible for VA loans if a husband or wife died on duty or from a duty-related injury. But times have changed. Now, when a veteran dies of any cause, a spouse may apply for a VA loan as long as the veteran lived with a duty-related condition for a period designated by the VA, and is eligible for compensation at the time of death. Some eligibility requirements include:

• Veterans who died in service, or of duty-related causes
• Veterans who were disabled and eligible for compensation
• POW or MIA

Surviving spouses should strongly consider checking with the VA about all bereavement benefits during this difficult time.

6. Certain Other Members Can Earn Eligibility

Did you know: Veterans of the 7 branches and National Guard/Reservists aren’t the only people who are eligible for VA loans? In fact, several other groups may be eligible, including:

• Academy Cadets
  • West Point
  • Air Force Academy
  • Coast Guard Academy
• Midshipmen
  • Naval Academy
• POW and MIA

Of course, certain rules apply. However, if you fall into one or more of these categories, you may be able to receive a VA loan.

7. There are Eligibility Requirements for the Home Too

You should know that the home you buy must meet VA minimum property requirements (MPRs), and that only certain types of homes can be financed under VA loans.

During the VA loan process, a VA-certified appraiser will use a checklist to ensure the structure meets MPRs. At a minimum, the home needs to be safe, sound, and sanitary with a good foundation, structure, and roof. Basic requirements like clean water, heat, power, and no health hazards are next on the list.

Any home with pests, mold, rot, or broken windows will not pass muster. The home must also have year-round access on a well-maintained road. Other requirements include distinct living areas for sleeping, cooking, dining, and bathing. Check with your real estate agent for additional requirements.

8. If Your Service is Cut Short, You May Still Be Eligible

It is possible to earn benefits if you have not met the minimum service requirements, and were discharged due to one of the following:

• Hardship
• Government convenience
• Reduction in force
• Certain medical conditions
• Service-connected disability

9. A COE in Hand Puts Any Doubts to Rest

If you have any doubts about your VA loan eligibility, a certificate of eligibility (COE) will clear it up. A COE is a proof you’re entitled to home loan benefits. If you think you may be eligible, obtain your COE. Lenders need this document before they can consider you for a VA-backed loan.

You can get a COE printed instantly through your lender if the VA has sufficient data for you and if the lender has access to the VA’s WebLGY system. If you are not in the system, your lender can still help you obtain your document. Ask your lender to provide the correct forms to fill out and expedite the process.

10. Eligibility is Just Part of the VA Loan Process

Eligibility is just one part of the VA loan. Four key parts make up the process. If you’re eligible and want to buy a home, get ready to prove that you also have the ability to pay your mortgage and any buying-related costs. Your lender will likely run a credit report very early in the process, and they will ask about your assets and income up front. Be prepared to back up any claims with documentation.

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However, the VA loan qualifying process is straightforward. While individual lenders determine the qualifying guidelines, a credit score of around 620 is generally needed, along with a debt to income (DTI) ratio of 41% or lower.

Exceptions to the DTI rule do apply, such as if you have more than enough residual income. You’ll need to have enough money left over to live after paying all your monthly expenses, including your new mortgage. An approved lender will determine if you have the ability to pay for your loan.

Finally

Although the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 made it more difficult for Americans to declare bankruptcy, the need to take this step continues. As the pandemic unfolds, there will likely be more individuals and families going through bankruptcy.

Using your post-bankruptcy income and credit wisely is the key to rebuilding your rating and standing on your own two financial feet again. If you can prove to lenders and employers that your post-bankruptcy life is in order, then this obstacle, too, will pass. Remember, Mark Twain, Walt Disney, Elton John, and Henry Ford all went on to have prosperous futures—and if they could put their bankruptcy behind them, so can you.