VA Derogatory Credit Rules: Bankruptcies & Foreclosures

The Department of Veterans Affairs recognizes that life events—like severe medical bills or a loss of employment—can force good borrowers into bankruptcy. The VA guidelines are specifically engineered to help Veterans bounce back faster than any other program.

Chapter 7 Bankruptcy (Liquidation)

A Chapter 7 bankruptcy completely wipes out your qualifying debt. Under VA guidelines, you are eligible for a new VA mortgage if at least two years have elapsed since the date of discharge. The underwriter will verify that you have re-established a good credit history (or refrained from incurring new bad debt) since the discharge.

The 1-Year Loophole: The VA allows lenders to approve a loan just 1-to-2 years after a Chapter 7 discharge if the borrower can prove the bankruptcy was caused by circumstances entirely beyond their control (such as a documented medical emergency or the death of a primary wage earner).

Chapter 13 Bankruptcy (Reorganization)

Because a Chapter 13 bankruptcy involves an active repayment plan to your creditors, the VA views this highly favorably.

• Qualifying During the Payout: If you are still in Chapter 13, you can get a VA loan if you have made at least 12 consecutive months of satisfactory payments, and the Bankruptcy Trustee (or Judge) provides written approval for you to take on the new mortgage debt.
• Qualifying After Discharge: If the Chapter 13 was successfully completed and discharged, there is virtually no waiting period. You can apply immediately.

A foreclosure is one of the heaviest hits your credit report can take. While Conventional loans force you into a 7-year penalty box, and FHA loans require 3 years, the VA cuts this down significantly.

The 2-Year Foreclosure Rule

A Veteran is generally eligible for a new VA-guaranteed mortgage if a foreclosure or Deed-in-Lieu of foreclosure was completed two years prior to the new loan application. The clock strictly starts on the date the title of the property formally transferred, not the day the foreclosure process began or the day the Veteran moved out.

Short Sales (Pre-Foreclosure Sales)

If you sold a property for less than what was owed (a short sale), the VA generally applies the same 2-year waiting period as a standard foreclosure if the mortgage was delinquent.

• The Exception: If you completed a short sale but were completely current on your mortgage payments and all other installment debts at the time of the sale, the VA does not penalize you. There is no waiting period to buy a new home.

This is the most critical distinction in VA lending. If your previous foreclosure or short sale was on a Conventional or FHA loan, you simply wait the 2 years and move on. However, if the foreclosed property was financed with a VA Loan, the government took a direct financial loss on your behalf.

Compromised Entitlement

If you foreclose on a VA loan, the specific dollar amount of VA entitlement tied up in that property is considered "compromised" (lost) because the VA had to pay out the guaranty claim to the lender. You will not get that entitlement back unless you pay the VA back in full for the loss.

Can I Still Get Another VA Loan?

Yes. Even if you lost some entitlement to a prior VA foreclosure, you almost certainly have "Bonus" or "Tier 2" entitlement remaining. After the standard 2-year waiting period, the lender will check the CAIVRS database, calculate your remaining Bonus Entitlement against the county loan limits, and you can buy a new home using a VA loan. (Note: You may be required to make a down payment if the new home price exceeds your remaining entitlement).