Back in 2008, the Department of Veterans Affairs became concerned about the number of VA-eligible homeowners who were paying high rates and unable to refinance.

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The Veterans' Benefits Improvement Act of 2008 changed the VA mortgage refinance guidelines to allow refinances from non-VA loans up to 100% of the home's value (the previous limit of 90%). One reason for instituting this change was, according to Secretary of Veterans Affairs Dr. James B. Peake, "to allow VA to assist a substantial number of veterans with subprime mortgages to refinance into a safer, more affordable, VA guaranteed loan. Veterans in financial distress due to high rate subprime mortgages are potentially the greatest beneficiaries," he added.

Bad credit home loans and VA refinancing

Okay, so you had stinky credit when you bought your home. And you aren't exactly wearing a halo today. So who do you have to kill or bribe to get a VA refinance? No one.

The VA doesn't expect perfection when it guarantees your mortgage. Here's what its guidelines say about folks who have had some financial boogers in their closets:

"In circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date of the last derogatory credit item."

So if you have paid your bills on time for the last year and are not dodging creditors, you have a decent shot at refinancing out of a bad credit mortgage.

What about Consumer Credit Counseling?

If you are in a debt management plan, that is, one of those arrangements in which you pay a monthly check which is distributed to your unsecured creditors, you may be considered for a VA refinance after 12 consecutive on-time payments have been made to the plan.

What about debt settlement?

Debt settlement is a different animal--because the debt settlement companies hold creditors' feet to the fire by having you NOT make your payments, you will not have a satisfactory payment history for at least a year, and you may have collection accounts and legal judgments popping up even then.

What about bankruptcy?

Bankruptcy is not the end of the world. If two years have passed since your Chapter 7 bankruptcy was discharged, it can be disregarded. This mayeven be possible after only one year if you have successfully reestablished credit(which you could do if you continued to pay your mortgage on time every month) and the bankruptcy was caused by circumstances out of your control like unemployment or illness. You can be refinanced while still in a Chapter 13 plan if you have made 12 payments on time and the trustee approves.

What about foreclosure?

Foreclosure is treated like a bankruptcy, two years distance and you're good. However, if the mortgage involved in the foreclosure was a government-backed loan like an FHA, VA, or USDA mortgage, you won't be able to get another government loan for at least three years after the mortgage insurance claim was paid (and that can be a long time after the actual foreclosure).