Bankruptcy Exceptions for VA Mortgage Underwriting Guidelines

By Shauna Zamarripa

VA mortgages are government-insured mortgages available to active-duty, retired or honorably discharged members of the armed services. Having a bankruptcy on your credit report can hurt your chances when applying for a VA-insured mortgage loan. However, there are a few exceptions to the rule.

The VA understands that things happen. Money can be so tight that it's difficult to pay bills on time. For eligible veterans applying for a VA loan with a Chapter 7 bankruptcy that is less than five years old, the veteran has the burden of proof to show the VA that the bankruptcy was as a result of circumstances out of his control. In other words, there must be a reasonable explanation that the VA will accept.

For Chapter 7 bankruptcies, veterans who can prove a loss of income due to death, sickness or divorce can still be eligible for VA loans, providing they have no recent late payments or collection accounts since the bankruptcy was discharged.

For Chapter 13 bankruptcies, the veteran must show one year of court-approved payment history to lenders prior to the application being approved. The borrower must also have the court trustee sign off on the application and provide a reason for the bankruptcy that the VA will accept. The VA will not entertain applications for veterans who just didn't want to pay their bills."

After a bankruptcy is settled, it will remain on a credit report for seven years. However, after that point, it is erased and will no longer have any impact on a buyer wishing to obtain a VA-insured mortgage.

VA loans do not require a down payment, but that doesn't mean a borrower can't make one. Veterans with bankruptcies can volunteer to make a down payment ranging from 3 percent to 20 percent to help get a VA loan approval. As with any other type of loan, the more money put up front, the more likely approval will be, even with a bankruptcy on your credit report.

In many cases, bankruptcies are a byproduct of divorce. In some states, one spouse can declare bankruptcy without it affecting the other spouse's credit history. In the case of qualifying for an exception to the VA loan financing rule, the veteran's spouse can declare bankruptcy and, upon settlement of the divorce, that bankruptcy no longer haunts the veteran's credit. In this case, an exception to the bankruptcy can be made providing the veteran has maintained his creditworthiness.

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