Getting a mortgage after bankruptcy
Bankruptcy can give you a new financial start, but it can also hurt your credit, which can make it difficult to get a mortgage. Here’s what it takes to get a mortgage after bankruptcy and how to increase your chances of qualifying for a loan.
Why it can be difficult to get a mortgage after bankruptcy
There are two main types of bankruptcy: Chapter 7 and Chapter 13. The first is the most common type and involves liquidation, which means that most or all of your outstanding debt is discharged. A Chapter 7 bankruptcy is usually approved for those with limited income to repay what they owe.
A Chapter 13 is known as a “reorganization bankruptcy”. Here, you create a plan to pay off your creditors, taken out of your income, at a percentage of what you owe them, up to 100%. This repayment plan takes longer than a Chapter 7, often three to five years, and it must be approved by a bankruptcy court.
Both types of bankruptcy can negatively impact your ability to get a mortgage. This is because a Chapter 7 or Chapter 13 stays on your credit report for 10 years or up to seven years, respectively, from the date of filing.
“A mortgage lender can see that at one point you had a hard time managing your debts,” says Adem Selita, CEO of The Debt Relief Company in New York City. “This can be interpreted as a wake-up call to loan officers, who may believe that history will repeat itself.”
You will also have to wait some time after bankruptcy before you are eligible for a mortgage again. Even after this time, it may be more difficult to get a mortgage than it would have been if you hadn’t filed for bankruptcy, and you could pay a higher interest rate.
How Long After Bankruptcy Can I Qualify For A Mortgage?
The good news is that you will not be barred indefinitely from qualifying for a mortgage following bankruptcy. After a minimum number of years, you can apply for a home loan and possibly be approved if you qualify.
Chapter 7 Bankruptcy
Leslie Tayne, lawyer and founder of Tayne Law Group in Melville, New York, says you are eligible for a mortgage a few years after a Chapter 7 debt discharge.
“For FHA and VA mortgages, the waiting period for Chapter 7 bankruptcies is two years from the date you file the documents with the court, three years for USDA mortgages, and four years for a conventional mortgage, ”explains Tayne.
Ashley Morgan, a debt and bankruptcy lawyer in Herndon, Va., Says there are limited availability programs that can allow a Chapter 7 debtor to qualify for FHA financing in as little as a year – “but you have to prove that your debts or problems were due to extreme circumstances beyond your control”, says Morgan, “such as the death of a spouse or the divorce”.
Chapter 13 Bankruptcy
Fortunately, the waiting periods after a Chapter 13 bankruptcy are shorter.
“For FHA, VA, and USDA mortgages, it’s only one year from the date the documents are filed in court,” says Tayne. “For a conventional mortgage, on the other hand, the waiting period is two years from the receipt or four years from the dismissal.
Tayne explains that a “discharge” occurs when you complete your court-established repayment plan and the case is discharged by the court. “Dismissal” occurs when you cannot complete the repayment plan and the case is therefore dismissed by the court – which essentially means that the bankruptcy has not been successful. Waiting periods are shorter for releases because the tax filer has made an effort to improve their credit through the repayment process.
However, you may be eligible for a mortgage during the Chapter 13 process if you can show that you made 12 months of payments on time and get court approval.
“Here, the court will often want to review the financing terms and compare your monthly mortgage payment to the list of rent payments in your bankruptcy,” Morgan explains. “If your new monthly mortgage payment is higher, you usually have to show how you will afford the increased payment and why that money shouldn’t go to creditors. “
Overall, the wait times for Chapter 13 are not as long as for a Chapter 7 “because the borrower has already taken the time to improve their financial situation through the Chapter 13 bankruptcy process,” which involves some reimbursement, ”explains Tayne.
What Kind of Mortgage Can You Get After Bankruptcy?
Once bankruptcy is voided and closed, you may qualify for a conventional mortgage as well as an FHA, VA, or USDA loan if you qualify.
“But you’ll have to stick to the timeout rule and show that you’ve worked to repair your credit,” says Tayne.
Most conventional mortgages will require a credit score of at least 620. Your credit score and the amount you can commit for a down payment (many lenders prefer 20%) will affect the interest rate that you pay. is proposed.
For an FHA loan, you will need to show that you have improved your credit and that you have not incurred any additional debt since bankruptcy.
Tayne says that FHA loans “generally require a lower minimum credit score and down payment than conventional mortgages” (as low as 580 and 3.5%, or 500 and 10%). USDA loans can be obtained with no down payment and there are no minimum credit requirements. Eligible veterans, military personnel, and qualified surviving spouses with a minimum credit score of 620 can apply for a VA loan without any payment.
How to Apply for a Mortgage After Bankruptcy
Experts recommend working hard to bounce back from bankruptcy. This means improving and monitoring your credit before attempting to apply for a post-bankruptcy loan.
To apply for a mortgage after bankruptcy:
1. Check your three credits reports for free on AnnualCreditReport.com, disputing and fixing the mistakes you spot, and following best practices for using credit.
“Make sure all debts that should be marked as included in your bankruptcy are showing zero balances on your credit reports,” Morgan cautions.
In addition, “focus on making payments on time and as completely as possible.” If you’re having trouble rebuilding your credit but new credit applications are turned down, consider opening a secured credit card, which is usually easier to qualify for, ”says Tayne.
2. Avoid asking for and taking on too much new debt., and avoid closing accounts, which can also lower your credit score, as it can affect the length of your credit history and your use of credit.
3. If possible, try to save. Remember, the more money you save, the better your interest rate will be.
4. Gather and organize all of your bankruptcy discharge and timeline documents, recent pay stubs, two years of tax returns, and other documents that lenders will want to see proof of.
5. Compare lenders and loan types by scrupulously respecting the minimum waiting periods in the event of bankruptcy. Tayne says some lenders, often smaller ones, are more willing to work with borrowers who have gone bankrupt, so it pays to look for the best mortgage rate.
“Look at the rates among as many lenders as possible,” says Selita. “Once your credit is taken out for a loan application, you actually have 30 days to apply for competitive rates with no further negative impact on your credit score. “
At the end of the line
Overall, bankruptcy shouldn’t stop you from getting a future mortgage, but you do want to make sure the timing is right.
“You don’t want to rush into a financial commitment if you can’t afford new debt,” says Selita. “Consider the long-term payoff of waiting to buy a home until your credit score improves further. “
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