Inaccurate Bankruptcy Discharge Dates & VA Home Loans

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Often, we receive urgent”I NEED HELP” calls from clients who receive bad news from their current lender.  The most common type of these calls involve a loan officer missing a tiny yet key detail that has led to some unfortunate circumstance for a buyer.   One such call involved a VA home loan and an inaccurate chapter 7 bankruptcy discharge date.

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Auto Underwriting Systems & VA Borrowers Credit

VA home loan rules require VA borrowers be 2+ years beyond their chapter 7 bankruptcy discharge date.   NOTE – exceptions to this rule do exist.  VA clients are falling victim to the auto systems used in VA lending misreading chapter 7 bankruptcy discharge dates.

In order to determine auto approval eligibility for auto approval VA loans go through auto underwriting.  However, flaws exist within the auto systems.  As expected, they pull bk discharge data from the “Public Records” section of a credit report.  The flaw is that both systems (“DU” and “LP”) also obtain data bk discharge date data from within the body of a VA client’s credit report and that data is often incorrect.

Assume an Arizona VA lender reviews a credit report for a client who discharged their chapter 7 bankruptcy 3 years ago.   This VA client has met the 2 year post chapter 7 bk wait period for per VA rules.  Sounds great right?  Maybe, maybe not.

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Auto Underwriting Misreads Bankruptcy Dates

The auto underwriting systems used to review an Arizona VA home loan often misread bankruptcy discharge dates.  Here is how.  VA borrowers with a trade-line tagged as “included in bankruptcy,” issues are not far behind.  Automated Underwriting may misread the “last reported” date within that trade-line as the bankruptcy discharge date rather than the actual discharge date.

What if the “last reported” date is after the actual bankruptcy discharge date?  This happens more than you would think.  Creditors often report bad data on trade-lines included in a chapter 7 bankruptcy.  Often, the “last reported” date is dated after the bankruptcy’s discharge date.

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 Misread Bankruptcy Dates Cause Trouble

The fact that DU and/or LP misreads a bankruptcy discharge date based on the “last reported” date can wreak havoc.  When the “last reported” date is within 2 years or less auto underwriting may see the VA clients bk discharge as too recent per VA rules.

The real trouble occurs when a loan officer assumes a borrower meets VA guidelines based on the “Public Records” section of the credit report.  However, as a result of appearing to have discharged a bk within 2 years, the VA buyer is subject to a manual approval.  What’s the big difference between a manual and an auto approval?

Manual VA Loan Approval vs. Auto VA Loan Approval

In short, a manual approval is more difficult to obtain than an auto approval.  The requirements are more strict.  For example:

  1. Auto approvals typically allow for a 56.99% max debt to income.  Manual approvals typically allow a 45% max debt to income ratio.
  2. Auto approvals typically allow for the omission of deferred student loan payments.  Manual approvals do not allow this.

Therefore, manual approvals often result in a VA buyer will be approved for a lower VA loan amount compared to an auto approval.  It is extremely important that a Veteran’s VA mortgage lender is aware of all credit related nuances.

By Jeremy House

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