If you are unable to meet your financial obligations due to unforeseen circumstances and you do not expect your financial situation to improve, bankruptcy may allow you the legal option to be discharged from your financial obligations. Many bankruptcies are caused by one-time occurrences, such as: job loss, unexpected excessive medical bills, and divorce. There are strict guidelines for mortgage financing after a bankruptcy. Individuals who have had a bankruptcy mistakenly think that they will not be able to qualify for a mortgage or to refinance their current mortgage, but depending on the type of loan, an individual may qualify in as little as one year after filing for bankruptcy. When applying for a mortgage, lenders look at several other factors besides credit scores, these include: down payment, employment history, and debt ratio.
There are 2 types of personal bankruptcies in the United States Bankruptcy Code; they include Chapter 7 and Chapter 13. The following is a brief description of each bankruptcy type and the waiting period to qualify for a mortgage.
The most common type of bankruptcy in the United States is Chapter 7. An individual must meet the requirements of the “means test” to be eligible for this type of bankruptcy. This option allows any creditor to repossess any property used as collateral on debt that will be discharged. The bankruptcy trustee may also liquidate any non-exempt property and distribute the proceeds to any unsecured creditors. There are exceptions to what type of debt can be discharged by the courts, these debts include: (1) tax liens, (2) student loans, and (3) spousal and child support. There are also limits (by state), regarding how much property can be exempted in a bankruptcy. This bankruptcy type can only be used by an individual once every 8 years. Depending on the mortgage type used, there are various waiting periods after a bankruptcy. For a Chapter 7 bankruptcy, the waiting period is 4 years for a conventional loan, 2 years for an FHA or VA loan, and 3 years for a USDA loan after discharge.
The second most common personal bankruptcy is Chapter 13. This option allows an individual to keep all their possessions and assets, but they must qualify for and accept a payment plan determined by the bankruptcy court to repay their creditors. The repayment amount is based on the individual’s income, monthly expenses, value of property, and debt being discharged in the bankruptcy. Most repayment plans are usually for a term of 3 to 5 years. Under this bankruptcy type, monthly payments are made to a trustee who oversees the completion of the bankruptcy and discharge. Unsecured debt and medical bills are not required to be repaid under this bankruptcy option. Depending on the mortgage type used, there are various waiting periods after a bankruptcy. For the Chapter 13 bankruptcy, the waiting period for a conventional loan is 2 years after discharge, whereas FHA, VA, and USDA allow financing as soon as the debtor has made 12 months of on-time payments. This is subject to court permission to obtain a mortgage if the bankruptcy has not been discharged.
When you apply for a mortgage after bankruptcy lenders will look closely at your post-bankruptcy credit history. So, it is important to keep all your payments on-time. Re-establishing credit is one of the most important factors after a bankruptcy. You should be actively involved in re-building your credit. Check your credit and scores on a regular basis, dispute any inaccurate credit, resolve any derogatory credit, open credit with secure credit cards and/or installment loans, and pay your bills on-time. Lenders will require a copy of your bankruptcy schedules and discharge paper; in addition to a thorough letter of explanation documenting the reason for the bankruptcy. Lenders will also require your credit to be reestablished with no derogatory credit since the bankruptcy. Ideally, an individual should have 1 installment loan and 2 revolving accounts (credit cards), with at least a 12 month payment history to show the lender they are able to manage their credit. For the revolving credit, it is in your best interest to keep the balance under 30% of the available credit limit, by doing this you will be maximizing your credit scores. There are other factors that lenders will use to qualify you for a mortgage after bankruptcy. These include down payment, income, employment history, and income stability. For additional information regarding mortgage financing after a bankruptcy, please contact a reputable loan officer.