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 of being released from your financial obligations. Many bankruptcies are caused by one-time events, such as: job loss, unexpected excessive medical bills, and divorce. There are strict guidelines for mortgage financing after bankruptcy. People who have had bankruptcy mistakenly think that they will not be able to qualify for a mortgage or refinance their current mortgage, but depending on the type of loan, a person can qualify in as little as one year after filing for bankruptcy. When applying for a mortgage, lenders consider several other factors in addition to credit scores, including: 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 type of bankruptcy and the waiting period to qualify for a mortgage.
The most common type of bankruptcy in the United States is Chapter 7. A person must meet the requirements of the “means test” to be eligible for this type of bankruptcy. This option allows any creditor to recover any property used as collateral for a debt that will be canceled. The bankruptcy trustee can also liquidate any non-exempt property and distribute the proceeds to unsecured creditors. There are exceptions to the type of debt that the courts can write off, these debts include: (1) tax liens, (2) student loans, and (3) spousal and child support. There are also limits (by state), regarding the amount of property that can be exempted in bankruptcy. This type of bankruptcy can only be used by one person once every 8 years. Depending on the type of mortgage used, there are several waiting periods after 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 cancellation.
The second most common personal bankruptcy is Chapter 13. This option allows a person to keep all their possessions and assets, but they must qualify and agree to a payment plan determined by the bankruptcy court to repay their creditors. The repayment amount is based on the individual’s income, monthly expenses, property value, and debt that is written off in bankruptcy. Most payment plans usually have a term of 3 to 5 years. Under this type of bankruptcy, monthly payments are made to a trustee who oversees the completion of the bankruptcy and liquidation. Unsecured debts and medical bills are not required to pay under this bankruptcy option. Depending on the type of mortgage used, there are several waiting periods after bankruptcy. For Chapter 13 bankruptcy, the waiting period for a conventional loan is 2 years after cancellation, while the FHA, VA, and USDA allow financing as soon as the debtor has made 12 months of payments on time. This is subject to court authorization to obtain a mortgage if the bankruptcy has not been liquidated.
When you apply for a mortgage after bankruptcy, lenders will take a close look at your post-bankruptcy credit history. Therefore, it is important to keep all your payments on time. Restoring credit is one of the most important factors after bankruptcy. You must be actively involved in rebuilding your credit. Check your credit and scores regularly, dispute any inaccurate credits, 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 settlement paper; plus a detailed explanation letter documenting the reason for the bankruptcy. Lenders will also require your credit to be restored without derogatory credit since bankruptcy. Ideally, a person should have 1 installment loan and 2 revolving accounts (credit cards), with a payment history of at least 12 months to show the lender that they can manage their credit. For revolving credit, you want to keep your balance below 30% of the available credit limit; By doing so, you will maximize your credit scores. There are other factors that lenders will use to qualify you for a mortgage after bankruptcy. These include down payment, income, work history, and income stability. For additional information on mortgage financing after bankruptcy, contact a reputable loan officer.