The distinction nobody explains: VA policy vs. lender overlay
There are two rulebooks sitting on top of your file, and almost nobody tells veterans they're different.
The first is VA policy — the VA Lender's Handbook, VA Pamphlet 26-7, plus the statute and regulations behind it. That's the floor. It applies to every VA loan everywhere.
The second is the lender's own overlay — extra conditions a particular lender stacks on top because of their investors, their risk appetite, or simply because they don't staff manual underwriting. Overlays are entirely legitimate. They're also entirely optional, and they vary enormously from one shop to the next.
When a veteran is told "you have to wait three years," that number is almost never in the handbook. It's the overlay. A retail bank has one set. I'm a broker, so I have a panel of wholesale lenders with different sets — and the whole job on a file like yours is knowing which one reads your situation the way the VA actually wrote it.
I've seen a lender's own published guideline print its 580 credit score minimum as though it were a VA requirement. It isn't. The VA has no minimum credit score. Its own credit standards material says the VA "does not use credit scoring" and that a lack of credit is not viewed as a negative factor. Every score floor you've ever been quoted came from a lender, not from the government.
Chapter 7 bankruptcy
The handbook sets three bands, and it measures them to the date of closing — not to your application date, which matters more than it sounds when you're close to a line.
Discharged more than two years ago. The handbook says it "may be disregarded." That is the whole rule. Not a longer look, not extra conditions — disregarded.
Discharged one to two years ago. Possible, but the handbook requires both of two things: that you've obtained credit since the bankruptcy and made those payments satisfactorily over a continued period, and that the bankruptcy was caused by circumstances beyond your control. The handbook's own examples are unemployment, prolonged strikes, and medical bills not covered by insurance. It also says the circumstances have to be verified — so this is a documentation exercise, not a story you tell.
One warning, because it catches people: the handbook states specifically that divorce is not generally viewed as beyond the control of the borrower. That's the VA's language, not mine, and it's the most common reason a one-to-two-year file gets turned down when everyone expected it to sail through.
Discharged within the past twelve months. The handbook says it will "generally not be possible" to determine that you're a satisfactory credit risk. Note the wording — it is not a statutory bar, but it is close enough to one that I'd rather use the time to get you ready than spend your money on an application that probably fails.
If your bankruptcy came from a business that failed
There's a separate path in the handbook for self-employed borrowers, and it gets missed constantly. If the bankruptcy was caused by the failure of your business, you can still be found a satisfactory credit risk if all four of these are true: you obtained a permanent position after the business failed; there's no derogatory credit before the self-employment; there's no derogatory credit after the bankruptcy; and the failure wasn't due to your own misconduct.
If you closed a business in the last few years and assumed that ended the conversation, it didn't. Bring me the timeline.
Chapter 13 — you may not have to wait at all
This is the one that surprises people most. You can close a VA loan while you are still in an active Chapter 13 plan. Not after it ends. During it.
The handbook's requirement is that you've satisfactorily made at least twelve months' worth of the plan payments, and that the Trustee or the Bankruptcy Judge approves of the new credit. Read that "or" carefully — it's in the handbook, and some lenders demand both anyway.
If you've finished the plan and made all payments satisfactorily, the handbook says the lender may conclude you've re-established satisfactory credit. There's no separate waiting period stacked on top of that.
The practical obstacle here isn't the rule, it's the plumbing. An active Chapter 13 usually kicks the automated underwriting system to a refer, which means the file has to be manually underwritten — and plenty of lenders simply don't do manual underwriting, so they decline rather than work it. That's not the VA saying no. That's a shop declining to open a drawer.
Foreclosure
Same shape as a Chapter 7. A foreclosure finalized more than two years from the date of closing may be disregarded. Inside one to two years, the handbook says it's "probably not possible" unless both requirements are met — credit obtained and paid satisfactorily since, and the foreclosure caused by circumstances beyond your control, verified.
If a foreclosure and a bankruptcy happened together, the handbook tells the lender to use the later of the two dates — the bankruptcy discharge or the transfer of title — to start the clock on re-established credit.
A Michigan wrinkle worth knowing. The date that matters is when title actually transferred, and in Michigan that is often later than veterans assume. Most residential foreclosures here run by advertisement and sheriff's sale, and a statutory redemption period follows the sale before the process completes. People date their foreclosure from the day they moved out, or from the sheriff's sale, and land on a different year than the documents show. Before we assume you're inside the window, let's pull the actual sheriff's deed and read the date on it. I've seen that one document move a file from "wait another year" to "let's go."
Short sale or deed-in-lieu — where the VA is far more generous than your lender
This is the single biggest gap between what the VA requires and what veterans get told, and if you take one thing from this page, take this one.
The VA does not set a fixed waiting period after a short sale or a deed-in-lieu. The handbook conditions it on behavior rather than time. Its language: if your payment history on the property was not affected before the short sale or deed-in-lieu, and you were voluntarily communicating with the servicer or holder, then a waiting period from the date the property transferred "may not be necessary."
In plain terms — if you stayed current and you picked up the phone and worked with the servicer instead of going quiet, the VA does not make you sit out. Not two years. Not any set period.
Nearly every veteran in this situation is quoted a two-year wait anyway, because that's the overlay most lenders apply. Some lenders' own guidelines say so openly; one of the largest VA lenders in the country states plainly that it usually requires two years but may waive it if you missed no payments in the twelve months before the sale. That's a lender's rule you're being quoted as though it were the government's.
If your payment history was affected going in — you were behind before the short sale — then it falls back into the foreclosure framework above, and the two-year and one-to-two-year bands apply.
What the VA looks at instead of a score
Since there's no score minimum in VA policy, the underwriting turns on other things, and they're things you can actually influence.
Twelve months of satisfactory payments. That's the re-established-credit test running through every section above. The handbook applies the same idea to unpaid or untimely debts: making timely payments on subsequent obligations for at least twelve months re-establishes satisfactory credit.
Credit counseling doesn't count against you. If you're in a Consumer Credit Counseling plan, the handbook says twelve months of satisfactory payments plus the agency's approval of the new credit can make you a satisfactory credit risk — and if you had good credit going in, participation is to be treated as neutral or even positive. The handbook expressly says not to treat it as a negative item.
Residual income. The VA is the only agency that tests whether you have real money left over each month after your obligations. It's a genuine safety valve on a file with a scar on it, and it's why VA loans have historically performed the way they have. There's more on how this works in my full Michigan VA loan guide.
Judgments and liens are different from collections. The VA does not require charge-offs and collection accounts to be paid off. Judgments and liens are another matter — those need to be paid or under a written repayment agreement.
One thing to check before you get your hopes up
Everything above is about credit. There's a second, completely separate question if the home you lost was financed with a VA loan: your entitlement.
The handbook says it directly — if the foreclosure, deed-in-lieu, or short sale was on a VA-guaranteed loan, you may not have full entitlement available for a new VA loan. When the VA pays a claim to your old servicer, that's a loss to the government, and the entitlement tied to that loan stays charged until the loss is repaid.
Here's the part that gets reported wrong everywhere: that usually does not lock you out. Most veterans in this position still have remaining entitlement they can use without repaying anything. I wrote a separate page on exactly how that works — VA entitlement restoration in Michigan.
What I'd actually do with your file
Send me the dates and the documents — discharge paperwork, the sheriff's deed or settlement statement, your Certificate of Eligibility if you have it. Two hours of reading beats two years of waiting because somebody guessed.
Then I match the file to the lender whose overlay fits it, rather than to whichever lender you happened to call. That's the entire advantage of a broker on a story like yours, and it's the reason I'd rather look at your paperwork than talk in generalities. No hard credit pull to have the conversation.
See how VA loans work in Michigan · First time buying? Start here.
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