VA Wait Timeframe
Ch. 4- Credit Underwriting; www.benefits.va.gov, pg 44-45
www.benefits.va.gov/warms/docs/admin26/pamphlet/pam26_7/ch04.doc e. Bankruptcy
The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.
Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law
You may disregard a bankruptcy discharged more than 2 years ago.
If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the applicant or spouse is a satisfactory credit risk unless both of the following requirements are met:
- the applicant or spouse has obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period, and
- the bankruptcy was caused by circumstances beyond the control of the applicant or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. (extenuating circumstances)
Divorce is not generally viewed as beyond the control of the borrower and/or spouse.
If the bankruptcy was caused by failure of the business of a self-employed applicant, it may be possible to determine that the applicant is a satisfactory credit risk if
- the applicant obtained a permanent position after the business failed,
- there is no derogatory credit information prior to self-employment,
- there is no derogatory credit information subsequent to the bankruptcy, and
- failure of the business was not due to the applicant’s misconduct.
If a borrower or spouse has been discharged in bankruptcy within the past 12 months, it will not generally be possible to determine that the borrower or spouse is a satisfactory credit risk.
Petition Under Chapter 13 of the Bankruptcy Code
This type of filing indicates an effort to pay creditors. Regular payments are made to a court-appointed trustee over a 2 to 3 year period or, in some cases, up to 5 years, to pay off scaled down or entire debts.
If the applicant has finished making all payments satisfactorily, the lender may conclude that the applicant has reestablished satisfactory credit.
If the applicant has satisfactorily made at least 12 months worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.
The fact that a home loan foreclosure (or deed-in-lieu of foreclosure) exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan.
- Develop complete information on the facts and circumstances of the foreclosure.
- Apply the guidelines provided for bankruptcies filed under the straight liquidation and discharge provisions of the bankruptcy law. See the preceding heading entitled “Bankruptcy.”
If the foreclosure was on a VA loan, the applicant may not have full entitlement available for the new loan. Ensure that the applicant’s Certificate of Eligibility reflects sufficient entitlement to meet any secondary marketing requirements of the lender.