Bankruptcy and Your VA Loan Benefit

This article is meant to help those who have been through a bankruptcy and are looking to get their financial feet back under them and move forward in their life’s journey. No segment of the economy has been untouched by the real estate collapse. Veterans and their families need to know the future looks bright, no matter the past.

If real estate and financial markets are terrains and the last few years have been a journey through them, then (wow), we are emerging from some bad jungle! The unfortunate part of this is that you or someone close to you likely has been financially harmed by the difficulty of the way.

How does Bankruptcy Affect Your VA Loan?

How does bankruptcy affect your ability to obtain a VA home loan? For most prospective VA borrowers, it’s pretty much good news: Experiencing a bankruptcy doesn’t mean you’re automatically out of the running for another VA-backed mortgage down the road.

Bankruptcy filings in federal court dropped 12 percent in the fiscal year 2013. So, yes, there is a recovery there. Some military personnel and vets and their families continue to seek shelter using either a Chapter 7 or Chapter 13 protection. The good news is that a responsible homeowner who has used Chapter 7 or Chapter 13 bankruptcy protection can, without a doubt, get their overall fiscal health back on track.

Accept this dose of reality: a bankruptcy filing has negative consequences, which almost without fail includes a harpoon into your credit score. The road back goes a bit uphill and requires your hard work and dedication—pretty much what you would expect to get back on track after a derailment.

The hard work and dedication part are crucial because a new lender is going to want:

    • an explanation of your bankruptcy
    • evidence that you have re-established good credit
    • proof of job stability

It’s the Discharge Date!

Here’s key information: VA lenders typically won’t talk with you until you’re at least two years beyond the date of a bankruptcy discharge. Remember this detail. The clock starts ticking with the discharge, not with the initial bankruptcy filing.

It can be a different story for veterans who file for Chapter 13 bankruptcy protection. If your bankruptcy was Chapter 13 you may be eligible for a VA loan just 12 months removed from your filing date. Satisfactory credit and no late payments during that time will be the critical factors, with a stable job situation. You will also need to obtain permission from the bankruptcy trustee to take on those new monthly payments.

Losing a Home to Bankruptcy or Foreclosure

Home ownership is a road that can have many forks when it comes to bankruptcy or foreclosure.  Some homeowners will essentially give back their home during the bankruptcy process. Others may lose theirs to foreclosure months or even years after the fact.

It’s common to have a short sale or foreclosure after a bankruptcy discharges. Mortgage lenders face the challenge of trying to determine the status of a mortgage and whether it was discharged in a bankruptcy. Policies can vary on this, so it’s important to check with a loan specialist.

As long as your mortgage debt is truly discharged with the bankruptcy, a foreclosure that follows in the wake wouldn’t “restart” your two-year waiting period. The good news here is there should be no double-whammy with a foreclosure that happens months or years down the road.

Boosting Your Credit

A hurdle to getting a VA loan after bankruptcy will be your credit score. This may be the most critical factor that you can directly address. Spending those two years after the discharge working on credit repair is critical, and making your payments on-time is not less important.

A bankruptcy is not the end of the world. The VA has a policy that is not overly harsh with the veteran who has had the misfortune of a bankruptcy. The VA mortgage loan benefit continues in force and in availability to the person who has a recovery plan and works that plan.

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Do You Qualify for a Refinance?

A popular refinance option has been the Home Affordable Refinance Program (or HARP 2.0). But hold on a second! HARP has its limitations. It’s most notable limitation is that it is a program available only to homeowners whose loan is owned by Fannie Mae or Freddie Mac.

So, your VA mortgage loan is not eligible for a HARP refinance. Did you know that those with a VA loan should strongly consider a VA streamline refinance instead? A VA streamline loan is better than the HARP program in several ways:

  • It does not require an appraisal.
  • It does not require private mortgage insurance (PMI). (This fact alone can save you a hundred dollars a month and more on your mortgage payment.)
  • It does not require income or asset documentation.
  • It has more lenient qualification standards.

Five Reasons to Refinance

Here are 5 strong reasons why a VA streamline refinance could really benefit you financially:

  1. Refinance to lower your interest rate. I have made the point before, interest rates are near a record low. And as I write this, 30-year mortgage rates are hovering above 3 percent and 15 year loans can be secured for an even lower rate. If your home is now financed at a higher interest rate, it may be a great time for you to consider refinancing. You could literally save tens of thousands of dollars just by taking the time to fill out the necessary paperwork and gather the needed documents.  Take advantage of expert help and talk to your VA mortgage loan expert.
  2. Refinance to shorten the term of your loan. If you have a 30-year mortgage, now may be a great time to consider refinancing. With record low interest rates, that 15-year mortgage may not be much more expensive than the 30-year loan payment. An experienced veteran loan expert can tell you in just minutes if this kind of a refinance makes sense. (When I refinanced our home from a 30-year mortgage at about 6 percent to a 15-year mortgage at 3.625 percent, the payment only increased by about $100.)
  3. Refinance to lower your payment. Refinancing to a lower VA interest rate could mean drastically reducing your payment and saving tens of thousands of dollars in interest. Lowering your mortgage payment is a great strategy that can free up hundreds of dollars per month for investing or saving. Although refinancing to lower your payment could increase the term of your loan, it could make sense in your particular situation.
  4. Refinance to cash out home equity. A VA cash out loan could be a great financial move in some circumstances. For instance, it may make sense to cash out some of your home equity in order to buy an investment property or start a business. It mostly depends on what you are trying to achieve and if you are someone who can manage your debts responsibly.
  5. Refinance from an ARM to a fixed rate loan. If you currently have an adjustable-rate mortgage, now may be the perfect time to refinance into a fixed-rate loan. Interest rates are low now, and projected to remain low, but they won’t remain this low forever. Locking into a low fixed rate can protect you from rising interest rates in coming years. Additionally, a fixed payment is easier to plan and budget for.

Can Refinancing Help You with Your Financial Goals?

Make a quick review of your financial goals What are you planning for your financial future?

  • Do you want to lower your monthly mortgage payment?
  • Do you want extra cash flow for savings or investment?
  • Do you want to pay off your mortgage and get out of debt faster?

This is a rare moment in the history of home mortgage rates; your’s is a rare opportunity with VA interest rates a remarkable value.  With some thorough research and planning, refinancing your mortgage could turn out to be the best thing for your family and for your pocketbook.

Get Started With Your VA Loan Today

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*Annual savings calculator based on 2015 monthly average savings extrapolated year-to-date.