Getting a VA Loan After Foreclosure

Going through foreclosure can devastate your credit score. Consumers could see their scores plummet by as many as 160 points following a foreclosure, according to credit scoring firm FICO. It can take years -- even a decade -- for a prospective borrower’s credit profile to fully recover. But it doesn’t mean you have to wait years and years to buy another home after experiencing a foreclosure. 

The good news is the VA loan’s more flexible credit requirements allow qualified veterans to bounce back significantly faster after a foreclosure than buyers seeking conventional financing.

Foreclosure Seasoning Periods

Foreclosure is essentially a legal process where the lender takes back their collateral. In some states it actually involves going to court, while other states don’t require a judge’s involvement.

Rather than go through the time and money it takes to formally foreclose, some lenders may offer alternatives to foreclosure, such as deed-in-lieu of foreclosure or a short sale.

A deed-in-lieu of foreclosure occurs when homeowners are allowed to deed the property back to the lender rather than endure full foreclosure proceedings. With a short sale, a lender is allowing you to sell the home for less than you owe.

Each of these can carry its own required waiting period, which you might also hear called a “seasoning period.” This means you’ll need to wait a certain number of months or years before being able to obtain another home loan.

Foreclosure & VA Loan Entitlement

VA loans continue to exhibit one of the lowest foreclosure rates on the market, but defaults do occur.

Borrowers who’ve lost a VA loan to foreclosure will have reduced VA loan entitlement, which will limit how much they can borrow without making a down payment. However, that previous foreclosure doesn’t automatically preclude them from using this hard-earned benefit again once they’re past the two-year mark.

Some borrowers may have some basic VA loan entitlement remaining, while others may be able to purchase again using their second-tier entitlement.

When the time comes, lenders will consult a borrower’s Certificate of Eligibility to help determine how much entitlement is remaining.

That, along with where in the country you’re buying, will help lenders calculate how much you can borrow before possibly needing a down payment.