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, let alone a decade, to buy another home after experiencing a foreclosure.
To be sure, in most cases there will be a required waiting period.
For VA buyers, 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.
Let’s take a closer look.
After Defaulting on a VA Loan
Foreclosure is one potential outcome once a homeowner defaults on their mortgage obligation. 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. These are still negative credit events that can seriously hurt your credit profile.
And each of these can carry its own required waiting period, which you might also hear called a “seasoning period.” Basically, it means you’ll need to wait a certain number of months or years before being able to obtain another home loan.
Foreclosure Seasoning Periods
Regarding foreclosures and deeds-in-lieu of foreclosure, you’re typically looking at a minimum two-year wait before being able to qualify for a VA loan. Homeowners who’ve experienced a qualifying financial hardship may be able to obtain financing sooner. Policies on that will vary by lender and loan type.
Some lenders may treat short sales the same as foreclosures, meaning a two-year seasoning period is required. Guidelines and policies can vary among lenders.
Every buyer’s situation is different, but Veterans United has no seasoning period following a short sale in many cases.
For comparison, buyers seeking conventional financing will often need to wait seven years after a foreclosure and four years following a deed-in-lieu or a short sale.
Other Default Challenges
Things can be more difficult for prospective borrowers who’ve lost a government-backed FHA loan to foreclosure.
Default or delinquency on federal loans can be a problem for VA lenders. Homebuyers who default on FHA loans may need to wait three years before being able to close on a VA home loan.
In addition, homeowners who’ve obtained a loan modification to avoid default may also encounter a two-year seasoning period before being able to close on a new VA loan. Guidelines can vary by lender.
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. But 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.
Veterans United loan specialists can help you with post-foreclosure financing. You can contact a loan specialist at 855-259-6455 or fill out this VA loan application to see what might be possible for you moving forward from default.