You can most definitely get a mortgage after having filed for bankruptcy, and you will not have to wait as long as you may believe. On average, the waiting period for successfully securing a mortgage to buy a new home is only two years.
With that said, how a particular lender is going to address your bankruptcy during its underwriting of your loan application is going to depend on both the type of mortgage you’re seeking, as well as the specific underwriting policies of the particular lender.
Federal Housing Authority (FHA) Loan
An FHA loan is a federally-insured loan often used by first-time home buyers with little cash available for down payment, because it offers the ability to put down as little as 3.5% of the home’s purchase price.
So, if you’re wanting to buy a $200,000 home with an FHA loan, you’ll need to have just $7,000 for the minimum required down payment.
Additionally, the credit scoring criteria are more forgiving than with conventional mortgage loans. Typically, if you have a credit score of 580 or above, and can accept paying an astronomical interest rate on the loan, you’ll be able to secure an FHA mortgage loan.
FHA Mortgages after Chapter 7 Bankruptcy
For most FHA-backed mortgage loans you’ll need to wait a minimum of two years from the date of your bankruptcy discharge before you’ll successfully qualify for the mortgage.
Your bankruptcy discharge is the order you’ll receive, signed by the Bankruptcy Court Judge, which eliminates your personal liability for your pre-bankruptcy debt.
In most cases, entry of the discharge order is the last activity involved with completion of the Chapter 7 bankruptcy case.
FHA Mortgages after (and during) Chapter 13 Bankruptcy
If you’re involved in a Chapter 13 bankruptcy, you may be able to get a mortgage while you’re still completing your Chapter 13 payment plan.
If you’ve successfully made at least twelve months of plan payments on time, and the Bankruptcy Court signs off on your proposed mortgage, then you will be able to successfully close a FHA loan during bankruptcy.
The Court will want to see that you can afford to make the anticipated mortgage payments, while still keeping current on the payments required by your Chapter 13 payment plan.
The United States Department of Agriculture offers a mortgage loan program for borrowers meeting certain income cap requirements, who are seeking to buy a home in a rural community.
USDA mortgage loans are far more easily obtained, and offer much lower interest rates, for borrowers who would otherwise be less likely to qualify for conventional financing at competitive interest rates.
Unfortunately, to be eligible for a USDA loan you must wait three full years from the date of your Chapter 7 bankruptcy discharge. If you were/are a Chapter 13 debtor, then the requirements are the same as with FHA loans, in that you must demonstrate 12 months of successful plan payments and get Court approval.
VA Mortgage Loans
The Veterans Administration mortgage loans are a benefit providing veterans of the United States Military the ability to secure home loans. If you are a veteran, a VA mortgage is, by far, the easiest mortgage to get.
You don’t need a down payment, you don’t need good credit, and you’ll be fine as long as at least two years have lapsed since your bankruptcy discharge.
Of course, individual private lenders who provide VA mortgages may have specific credit score or other underwriting criteria, but mostly VA loan is always going to be your easiest option if you are a veteran.
Conventional mortgage loans will likely be the most challenging for you to get following your bankruptcy, however, if you have a good debt-to-income ratio (which after bankruptcy, you probably do) and at least two years have lapsed since your Chapter 7 discharge, then you’ve got a decent shot at landing a conventional mortgage.
For those without stellar credit and substantial down payments, you will likely be required to pay a mortgage insurance amount each month in addition to your principal and interest.
This mortgage insurance is a method for the lender to insure repayment of the note, just like a mortgage guaranteed by the FHA or VA, and would most likely only be required in the event your house is worth less than 25% of loan balance.
Benefits of Conventional Financing
The government-backed loans may allow someone with less cash available for down payment to get a mortgage, however, they can with unyielding underwriting requirements which may bar certain borrowers.
If you have 20% available for a down payment, but have a high debt-to-income ratio, or have student loan payments which otherwise make you ineligible for FHA loans, conventional financing may provide the lender flexibility in underwriting such that you may successfully get a mortgage.
The FHA has a restriction with respect to student loan payments for determining debt-to-income ratios of prospective borrowers.
An applicant for a FHA mortgage must use the greater of (a) one-percent his or her outstanding student balance on the loan; or (b) the monthly student loan payment as reported on the applicant’s credit report; or the actual documented payment, provided the payment will provide for payoff of the student loan balance during the term.
For example, assume your student loan balance is $100,000. So, one-percent of the balance is $1,000, and the $1,000 will be used by the underwriter regardless of whether your payment is less than $1,000. That may push your debt-to-income level out of a qualifying range, even though your actual student loan payment may be less than the $1,000.
With conventional financing, you may be able to amortize your student loan balance over the life of the mortgage, which may mean a lower student loan payment than you are actually making.
For example, assume you owe $50,000 in student loan debt. Using the one-percent of the balance rule, you’d be assigned a monthly student loan payment of $500 per month.
However, $50,000 amortized over 30 years at 6% interest is just $300 per month. You may be able to have the $300 figure used for calculation of your debt-to-income ratio rather than the higher, $500 student loan payment you’re actually making.
Waiting Periods for Conventional Mortgages
Waiting periods for most conventional mortgages have relaxed in recent years. I expect this is the case because of the astronomical number of bankruptcy filings following the recession.
Regardless, eligibility requirements have eased, such that you’ll be required to wait 2-4 years after a Chapter 7 discharge.
The wait is 2 years if you can demonstrate that your bankruptcy filing was necessary due to circumstances beyond your control, and 4 years if your bankruptcy filing was simply due to financial mismanagement.
For Chapter 13 debtors, the wait is 2 years following receipt of a Chapter 13 discharge, or 4 years after a Chapter 13 dismissal.
You see, bankruptcy is not going to prevent you from ever buying a new home. You just need to wait out the required waiting period, and also take the right actions following your bankruptcy to rebuild, and maintain, your credit scores as quickly as possible.
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