Is it Possible to Buy a House After Bankruptcy?

FHA loans can be an excellent option for bankruptcy victims because they can purchase a house with lower credit scores.

What is the best time to buy a house after bankruptcy?

Before you can obtain a loan, you must first wait for a judge to discharge your bankruptcy. How long will you have to wait before you can get a loan? It all depends on what type of bankruptcy you have and what type of loan you are applying for.

Chapter 7

Chapter 7 bankruptcy is the most popular type of bankruptcy. A bankruptcy court will wipe out your qualifying debts during a Chapter 7. Your credit rating will also be affected.

To be eligible for a conventional loan, you must wait at least four years after your Chapter 7 bankruptcy is discharged or dismissed by the court.

The government-backed mortgage loans are slightly more flexible. To qualify for a USDA loan, you must wait three years after your bankruptcy discharge or dismissal. You only need to wait two years after your discharge or disqualification the eligible for a VA or FHA loan.

Chapter 13

Chapter 13 bankruptcy involves a restructuring of your debts. Chapter 13 bankruptcy may require you to make regular payments to creditors. You can keep your assets, and your credit score won’t be affected as much by Chapter 13 bankruptcy. Although a Chapter 13 bankruptcy is more serious than a Chapter 7 bankruptcy, most loans have a waiting period.

You will need to wait depending on how the court handles your Chapter 13 bankruptcy. You must wait at most 4 years after your bankruptcy discharge date to be eligible for a conventional loan. The waiting period for a discharge of bankruptcy is four years from the date you filed it and two years from your dismissal.

Government-backed loans are subject to the same standards as Chapter 7 bankruptcy. However, they have a slightly more relaxed lending policy. After a Chapter 13 bankruptcy, USDA loans must be waited for a period of one year. The waiting period does not change if you are granted a discharge or dismissed. FHA and VA loans require that you first apply for a loan.

What type of mortgage can you get after bankruptcy?

Technically, you can get any type mortgage loan even if you have been through bankruptcy. No rules will prevent you from applying for a loan if you have been through bankruptcy. You can apply as long as you fulfill the above waiting period. However, you may be able to qualify for certain types of mortgage loans more easily than others.

If you have a bankruptcy record, an FHA loan might be a good option. FHA loans have shorter waiting periods than other types. After a bankruptcy court discharges you or dismisses you, there is no waiting period if you file a Chapter 13 bankruptcy. FHA loans have a lower requirement than other government-backed loans.

FHA loans are available to people who have had bankruptcy. They require less credit checks. Your credit score will be affected even if your bankruptcy is dismissed or discharged by the court. Chapter 7 bankruptcy stays on your credit report for ten years, while Chapter 13 bankruptcy remains on your credit report for seven.

Your credit score will drop significantly during this period than it was before you filed for bankruptcy. An FHA loan can be used to buy a house with credit scores as low as 580. A loan with a score of 500 points may be possible if you make a minimum 10% down payment. Rocket Mortgage(r) requires a minimum credit score of 580.

How to Apply for a Mortgage after Bankruptcy

Let’s now take a look at what steps you need to follow when applying for a loan.

Step 1: Repair Your Credit

Your credit score will be affected if you have a bankruptcy on your credit record. Although it is possible to obtain a mortgage loan if you have a bankruptcy on your credit report, you must still meet your lender’s minimum credit score requirements. If your credit score is 580 or less, you will need to spend some time to improve it before you can apply for a loan.

These are the steps that you should take to rebuild your credit.

Re-establish credit. You may discover that your credit reports are almost entirely erased after a bankruptcy. Re-establishing credit responsibly is one of the first steps after bankruptcy.

Secured credit cards are a great way to start rebuilding your credit. You deposit with your credit card company when you open a secured card. This deposit will become your line of credit. You then make monthly payments to your account and repay your debt. Even if you have a poor credit score, you can still get a secured card.

Reduce your debt. After your bankruptcy is closed, you should use any extra money to pay down your debt. This shows creditors you are serious about changing your financial situation and improving your credit score. You may also be eligible for a mortgage if your debt is lower.

All bills must be paid on time. It is the fastest and most efficient way to improve your credit score. Make your monthly loan and credit card payments according to schedule. If you are having trouble keeping track of your expenses, auto-pay may be a good option. Many credit cards and loan companies offer auto-pay, which automatically deducts the minimum payment each day.

Step 2: Write A Letter Of Explanation

When you apply for a mortgage, your lender will carefully review your financial situation. Lenders take on risks every time they issue a mortgage. Lenders must know that you will make your monthly payments on time. A bankruptcy record is a red flag.

A letter of explanation can help you increase your chances of getting a mortgage after bankruptcy. A letter of explanation gives your lender additional information about your bankruptcy and the reasons you declared bankruptcy.

It might be helpful to provide details about the circumstances leading to your bankruptcy filing, as well as how your financial situation has changed. You might also want to explain what you have done to avoid bankruptcy in the future, such as paying off debt or building an emergency fund.

Although a letter of explanation is not required to obtain a mortgage after bankruptcy filings, it can help your lender see a bigger picture than just a few numbers. When you apply for preapproval, include your letter of explanation.

Step 3: Get preapproved

Once you’ve gone through your waiting period and your finances are in order, it’s time to apply for a mortgage preapproval. Preapproval is a letter from the lender that informs you how much money you could get for a mortgage loan. Preapproval is essential for two reasons.

  • A preapproval letter informs you of the homes that are within your budget. It also allows you to narrow down your property search.
  • A preapproval informs sellers and real estate agents that you can secure the financing you need to purchase the property you wish to offer. This is especially important after bankruptcy.

When you apply for preapproval, your lender will need financial documentation. If you have all your documents together before applying, you can be preapproved quicker. Your lender will require your last two papers.

  • W-2s
  • Statements from banks
  • Most recent paystubs

Preapproval and prequalification can be confusing. Prequalifications don’t usually require asset verification. Preapprovals are often lighter than prequalifications. Preapproval is better than prequalified.

Step 4: Respond to Lender Inquiries

Your lender will take care of the rest once you have submitted your preapproval form. To determine if you are eligible for a mortgage, your lender will examine your credit, income, and assets. Your lender will issue a pre-approval letter if you are a suitable candidate. This letter can be used to begin looking for a home.

Sometimes your lender may need to reach out to you to inquire about credit reports. This can happen after a financial crisis, such as bankruptcy. To increase your chances of approval, be honest with your lender and respond quickly to their inquiries.

Summary

It’s possible to get a mortgage after bankruptcy. Depending on your type of bankruptcy, the amount of time it takes to get a mortgage after your bankruptcy is discharged or dismissed will depend on how long you wait.

Let’s suppose you file for Chapter 7 bankruptcy. Depending on the type of loan, you will need to wait between 2 and 4 years. You may be eligible to apply for a Chapter 13 bankruptcy immediately, or you might need to wait up until four years. 

You may need to improve your credit score before you apply for preapproval. You may need to re-establish credit if your credit score falls below 580 points before you use it.

After your credit rating improves, you can write a letter explaining your bankruptcy. After your waiting period has expired, you can apply for preapproval for a loan. For the best chance of approval, make sure you have all your financial documentation together and respond quickly to any lender inquiries.

 

Tags

extenuating circumstances
buy a home
home loans
credit history