Mortgage After Bankruptcy (Chapter 7 or 13): How To Qualify
Bankruptcy Is Not The End
For most people, the idea of filing for bankruptcy can be scary. The term “going bankrupt” just sounds frightening.
For those considering bankruptcy, many questions are likely to come to mind. For example:
- How will bankruptcy affect my credit scores?
- How long will it take for me to rebuild my credit?
- How long before I can get approved for a mortgage?
Bankruptcy can mean a fresh start. And, thankfully, it doesn’t mean the end of the road for getting a mortgage.
In fact, homeowners may be pleasantly surprised to know that it’s possible to buy a home just two years after bankruptcy.
The Effects Of Bankruptcy On Your Credit
There’s no way to sugarcoat the negative effect a bankruptcy will have on your credit scores.
Regardless of the type of bankruptcy filed, a bankruptcy will hit your credit report hard, and cause your scores to drop significantly.
Chapter 7 bankruptcies, the type designed to wipe out all your debt, will remain on your credit report for a period of ten years.
Chapter 13 bankruptcies, which set up regular payments for debts over a specified period, will stay on your credit for seven years.
Fortunately, the impact on your credit scores will lessen over time.
It’s a good idea to monitor the progress of rebuilding your credit after bankruptcy. This can be done easily through a number of free online credit reporting services.
How Long After Bankruptcy Can You Apply For A Mortgage?
The waiting periods required after bankruptcy will vary according to the type of bankruptcy and the type of mortgage loan for which you’re applying.
Most lenders will require paperwork from the bankruptcy court documenting your bankruptcy filing, as well as documentation to show it has been discharged.
FHA and VA loan requirements
Both FHA and VA mortgage guidelines carry similar requirements with regard to waiting periods after a bankruptcy.
You can apply for an FHA loan or a VA mortgage after your chapter 7 bankruptcy has been discharged for two years.
Chapter 13 bankruptcies are viewed a bit differently. FHA and VA allow homeowners to apply for a mortgage as long as they’ve made 12 on-time bankruptcy payments, and they receive bankruptcy court approval.
USDA mortgage loan requirements
In most cases, you can apply for a USDA rural loan after your chapter 7 bankruptcy has been discharged for three years.
Much like its sibling government entities, FHA and VA, it’s possible to qualify for a USDA loan while still in chapter 13 bankruptcy.
As with other government-backed loans, you can apply for a USDA mortgage as long as a minimum of 12 timely payments have been made, and the borrower receives written permission from the bankruptcy court.
Conventional mortgage loan requirements
Fannie Mae and Freddie Mac — the national rule-makers for conventional loans — require longer waiting periods than government loans.
Homeowners may apply for a conventional loan after their chapter 7 bankruptcy has been discharged for four years.
As is the case when qualifying for other mortgage loans, conventional loan waiting periods for chapter 13 bankruptcies are less stringent. However, unlike their government counterparts, conventional loans will require the chapter 13 bankruptcy to be discharged, not just on a payment plan.
You can apply for a conventional loan after your chapter 13 bankruptcy has been discharged for two years.
Keep in mind that no matter which loan you apply for, lenders may impose “overlays.”
Lender overlays are tougher standards than even the lending agencies themselves call for.
For instance, FHA states you may receive mortgage approval just two years after a Chapter 7 bankruptcy. But a lender may require three years, or even longer.
Shop around. Ask about your lender’s policy on mortgage qualifying after bankruptcy. If it can’t help you, try another lender.
Tips For Qualifying For A Mortgage After Bankruptcy
Regardless of the type of mortgage for which you’re applying post-bankruptcy, there are a number of steps you can take to begin repairing your credit right away.
Establishing new credit via secured credit cards and installment loans, and making on-time payments on all credit accounts.
A common mistake that people make after going through a bankruptcy is to shy away from new credit. New accounts are imperative, however. They begin to rebuild your bankruptcy-damaged credit scores.
New credit also is important because it shows the lender your ability to make on-time payments. The idea is to prove to the lender that the bankruptcy was an isolated event.
A quick and easy way to help re-establish your credit is through a secured credit card.
A secured credit card is usually granted by your bank and is backed by the money you have in your savings account as collateral.
Secured credit cards are not to be confused with debit cards. Unlike debit cards, most secured credit cards report to the credit bureaus, allowing you to restore your credit scores.
Installment loans have an even greater impact on your credit scores. Personal loans and auto loans are examples of installment loans.
Although you may not qualify for the lowest interest rate on an installment loan due to your recent bankruptcy, the positive effect on your credit scores can conceivably offset the higher rate.
Here’s another very important detail not to be overlooked: Underwriters will look very closely at how you’ve paid your bills since your bankruptcy.
Make all of your payments — on everything — in a timely manner; especially housing-related payments such as your rent or mortgage.
Posted by: Carlson Mortgage – a St. Louis mortgage broker providing home loans in the state of Missouri. We are ranked as the #1 lender in Missouri on Zillow.com. We can be reached at (314) 329-7314 seven days a week. Let us be your source for some of the lowest mortgage interest rates in St. Louis on conventional, FHA, Veterans (VA), USDA, Jumbo and condominium (condo) financing. We have 11 years of experience providing home loans and mortgage services in St. Louis that are tailored individually to your unique needs and to your financial situation. Our loan officers speak English, Spanish and Russian. Call us today to inquire about home loan interest rates, to get pre-approved for a purchase or a refinance mortgage, or if you have any general mortgage lending questions. Read the original article here