When one files for bankruptcy (whether it be Chapter 7 or Chapter 13), there’s a high likelihood that one’s future with mortgage qualifications will be affected. However, there are a few things one will need to know when qualifying for a mortgage after a bankruptcy has been filed.
Bankruptcy & Mortgage
For many, bankruptcy is a way to pump the brakes on debt. This does not mean that getting a mortgage is off the table post-bankruptcy, but much of what happens with your mortgage depends on where you stand with your bankruptcy filing.
Chapter 13 and Chapter 7 Bankruptcies
For mortgage lenders, liquidation bankruptcies (also known as Chapter 7) and reorganization bankruptcies (known as Chapter 13) are handled very differently. Individuals who have filed Chapter 7 tend to receive harsher treatment in comparison to Chapter 13 filers. This is due to the fact that Chapter 13 filers tend to pay all or some of the amount owed, as Chapter 7 filers lose their debts immediately. However, it should be noted that mortgages are not off the table after bankruptcy has been filed (or what they were filed as).
Dismissal Bankruptcy vs. Discharged Bankruptcy
Bankruptcy can end in one of two different ways:
For Chapter 7, the court required one to give up assets so that they could have a clean slate and have no debt.
For Chapter 13, all court-required payment plans are met and the creditors write off remaining debts. Even in Chapter 13 bankruptcy, one does not have to wait to get a mortgage.
A bankruptcy dismissal is another ending that one may pursue. The dismissal happens in the event one decides to withdraw the filing, the court received false information, or the planned payments were not made. In comparison to discharges, dismissals are treated harshly. A dismissal means there is no bankruptcy, which makes one lose protection from creditors.
Standard Loan Requirements for FHA and VA
Both VA and FHA guidelines have similar waiting periods for mortgages after a bankruptcy claim has taken place. However, much of this depends on your circumstances.
For example: if a Chapter 7 bankruptcy has been discharged for at least 2 years, one can apply for a VA mortgage or FHA loan.
As for Chapter 13 bankruptcies, they’re put under a different microscope. The VA and FHA will still allow homeowners to apply for their mortgage even if they are in bankruptcy. However, applicants must have made 12 bankruptcy payments on time and one year must have passed since filing. In addition to this, the trustee or bankruptcy court must approve the mortgage in question.
Requirements For Standard USDA Loans
In several instances, one may apply for a USDA loan after Chapter 7 bankruptcy has been discharged for at least 3 years.
Much like any other government-backed loan, one may apply for a USDA mortgage loan after the bankruptcy has already been filed. The payment plan doesn’t even have to be completed; it just needs twelve on-time payments. In addition to this, the bankruptcy court will need to grant the individual written permission for the mortgage loan.
Mortgage Loan Conforming Requirements
Freddie Mac and Fannie Mae, the main institutions with conforming loans, will allow filers of Chapter 7 bankruptcy to apply for a mortgage after bankruptcy has taken place. However, there’s oftentimes a 4-year wait after the case is dismissed or discharged.
For Chapter 13 bankruptcies, the wait is usually 2 years. However, it must be two years after the case has been discharged (and not filed). As Chapter 13 bankruptcies 10 to take 5 years for discharge, it will likely take 7 years from the filing date for a conforming mortgage program.
Re-Establishing Credit Post-Bankruptcy
There are several steps one can take to fix their credit post-bankruptcy. Such steps are:
Establishing new credit cards via “second chance” cards and installment loans. Make sure all payments on the accounts are paid on time. Try to avoid fee-harvesting cards that come with high costs and only utilize accounts that report history to significant credit bureaus.
If you’re renting, see if you can get your rental history on your credit report. Anyone who is underwriting will focus on bills paid post-bankruptcy.
If you know relatives or friends with excellent credit, they might be able to add you to their account as an authorized user. This will transfer a good payment history and improve the credit score on your account.
Considering the information above, it is possible to apply for a mortgage after bankruptcy. Thankfully, we’re here to do exactly that. Contact us today because Bunch & Brock can handle all aspects of your bankruptcy case.