Q: I filed for Bankruptcy and it was discharged. My mortgage lender never filed for foreclosure and sold my mortgage to another lender three years later. The CAIVRS system told my loan officer that would have to request an “Eligibility Letter.” to get a new VA loan, even though the three year time requirement has been met. What is an Eligibility Letter?
A: An Eligibility Letter is just as it sounds -- a determination if you again meet the criteria for obtaining a new VA home loan.
In your case, it most likely is to make certain that the appropriate time has elapsed since the discharge of your bankruptcy and that your former mortgage debt was properly included in your filing. You will also have needed to re-establish appropriate credit and more in order to qualify for a new mortgage.
So that you can see the nature of the Eligibility Letter request, here is a relevant excerpt from the VA's underwriting guidelines your lender must follow:
VA Lenders Handbook M26-7
Chapter 4: Credit Underwriting
Topic 7: Credit History - Required Documentation and Analysis
Section: b. How to Analyze Credit
Bankruptcy
The fact that a bankruptcy exists in an applicant’s (or spouse’s) credit history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the bankruptcy. Consider the reasons for the bankruptcy and the type of bankruptcy filing.
Bankruptcy Filed Under the Straight Liquidation and Discharge Provisions of the Bankruptcy Law (Petition under Chapter 7 of the Bankruptcy Code):
If the bankruptcy was discharged more than 2 years ago from the date of closing for purchases and refinances, it may be disregarded
If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that the borrower or spouse is a satisfactory credit risk unless both of the following requirements are met:
1. The borrower(s) had obtained consumer items on credit subsequent to the bankruptcy and has satisfactorily made the payments over a continued period.
2. The bankruptcy was caused by circumstances beyond the control of the borrower or spouse such as unemployment, prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified. Divorce is not generally viewed as beyond the control of the borrower and/or spouse.
If the bankruptcy was discharged within the past 12 months, it will generally not be possible to determine that the borrower(s) is a satisfactory credit risk.
If the bankruptcy was caused by failure of the business of a self-employed borrower, it may be possible to determine that the borrower is a satisfactory credit risk if all four of the following are met:
1. The borrower obtained a permanent position after the business failed
2. There is not any derogatory credit information prior to the self-employment.
3. There is not any derogatory credit information subsequent to the bankruptcy.
4. Failure of the business was not due to the borrower’s misconduct.
Petition Under Chapter 13 of the Bankruptcy Code
This type of filing indicates an effort to pay creditors. Regular payments are made to a court-appointed trustee over a 2 to 3-year period or, in some cases, up to 5 years, to pay off scaled down or entire debts.
If the borrower(s) has finished making all payments satisfactorily, the lender may conclude that the borrower has re-established satisfactory credit.
If the borrowers) has satisfactorily made at least 12 months’ worth of the payments and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give favorable consideration.
Foreclosures
The fact that a home loan foreclosure (or deed-in-lieu or short sale in lieu of foreclosure) exists in a borrower(s) history does not in itself disqualify the loan. Develop complete information on the facts and circumstances of the foreclosure
You may disregard a foreclosure finalized more than 2 years from the date of closing. If the foreclosure was finalized within the last 1 to 2 years from the date of closing, it is probably not possible to determine that the borrower(s) is a satisfactory credit risk unless both of the following requirements are met:
The borrower (s) has obtained consumer items on credit subsequent to the foreclosure and has satisfactorily made the payments over a continued period, and
The foreclosure was caused by circumstances beyond the control of the borrower (s) such as unemployment; prolonged strikes, medical bills not covered by insurance, and so on, and the circumstances are verified.
If a foreclosure, deed in lieu, or short sale process is in conjunction with a bankruptcy, use the latest date of either the discharge of the bankruptcy or transfer of title for the home to establish the beginning date of re-established credit. If there is a significant delay in the transfer of title, the lender should contact the RLC of jurisdiction for guidance.
Deed in lieu or short sale
For a deed in lieu or short sale, develop complete information on the facts and circumstances in which the borrowers) voluntarily surrendered the property. If the borrower’s payment history on the property was not affected before the short sale or deed in lieu and was voluntarily communicating with the servicer or holder, then a waiting period from the date transfer of the property may not be necessary.
If the foreclosure, deed and lieu or short sale was on a VA-guaranteed loan, then a borrower may not have full entitlement available for the new VA loan. Ensure that the borrower’s COE reflects sufficient entitlement to meet any secondary marketing requirements of the lender.
Simply put, by requesting an Eligibility Letter your lender is simply following the borrower qualification procedures outlined in the VA regulations, and to make sure you meet the requirements the VA sets for backing your mortgage.
