If you've recently gone through a foreclosure, you may be wondering if you'll ever be able to purchase a home again. Fortunately, it's often possible to buy a home after a foreclosure if you've rebuilt your credit and met the waiting or seasoning period.
Here we look at what that means and how you can get a VA loan after foreclosure.
Getting a VA loan after a foreclosure is possible, but you may have reduced VA loan entitlement if you purchased the foreclosed home with a VA loan.
Reduced VA entitlement decreases your $0 down buying power, and you might need a down payment depending on your remaining entitlement and the new home's price. You’ll also need to borrow a minimum amount of money to make it work.
Keep in mind your Certificate of Eligibility (COE) may seem to indicate you've used all of your $36,000 in basic entitlement. However, you typically have a second-tier or bonus entitlement remaining up to $125,800 in 2022 for a county with the standard loan limit. Your second-tier entitlement may be more in high-cost counties.
For a refresher, VA entitlement is the monetary amount the government backs or guarantees in the event of foreclosure and is typically 25 percent of the loan amount. That backing from your VA entitlement is what allows lenders to provide a mortgage with $0 down.
However, when you default on a VA loan, you basically forfeit whatever entitlement was used to obtain that loan. The ability to get a new VA loan with $0 down with a prior foreclosure can depend on the home price, the county you purchase in and your remaining entitlement.
Let's look at an example.
If a Veteran purchased a home for $300,000, they’re typically using about $75,000 of their entitlement, which represents a quarter of the loan. If the home later gets foreclosed on, the Veteran loses that $75,000 in VA loan entitlement.
If, down the road, the Veteran looks to purchase again in a county with a standard loan limit, they'll only be able to buy a home up to $347,200 without a down payment. The math looks like this:
If the home price falls above the Veteran's entitlement, they would need a down payment equal to 25 percent of the difference between their max entitlement and the purchase price.
Veterans using their second-tier of entitlement must also borrow a minimum amount of money. That minimum is $144,001, and it can include financing the VA Funding Fee into the total loan balance.
Purchasing again after a VA foreclosure can be a bit math-heavy, which is why it's best to talk to a lender to help determine your remaining entitlement. A qualified lender can pull your COE and help walk you through the steps of getting a VA loan after foreclosure.
Typically, you can't restore your full entitlement if:
In all three cases, the VA won't fully restore VA loan eligibility because the government suffered a loss on the original loan. The only way to regain that lost entitlement is to repay the government in full.
However, per the previous example, you don't necessarily need your full entitlement to purchase again or take advantage of the $0 down benefit.
Generally, Veterans who've experienced foreclosure must undergo a minimum two-year waiting period before a lender will provide a new mortgage.
Be aware the waiting period might exceed three years if the Veteran's foreclosure came from another government-backed product, such as an FHA or USDA loan.
The waiting period for conventional financing is even longer, typically four years.
Veterans who've experienced a qualifying financial hardship may be able to obtain a mortgage sooner. Qualifying financial hardships typically result from extenuating circumstances outside the Veteran's control - such as a severe illness or death of a spouse that caused the foreclosure. Policies vary by lender and loan type.
Meeting the seasoning period doesn't automatically qualify a Veteran for another VA loan. Each borrower still needs to meet the lender's credit and income requirements. Lenders typically require a 620 or higher for a VA loan and want to see stable and reliable income.
If you're ready to start your VA loan after a foreclosure, we've compiled a list of the top VA lenders by loan volume here.