Getting A Mortgage After Bankruptcy
You may not be able to get a mortgage during bankruptcy, but you can get one after bankruptcy if you otherwise qualify. Nonconforming loans like those from government agencies may not even have a waiting period.
The following sections will go over what you need to know if youre trying to buy a new house or refinance your current home after a bankruptcy.
Before we get into specifics around guidelines, its also worth noting in general that a bankruptcy of any kind has a major negative impact on your credit. Its not impossible to move forward and get a mortgage down the line, but you may have some recovery to do. A secured credit card or credit builder loan can help. Check out this post on buying a house with bad credit.
How Long Does It Take To Reestablish Credit
Rebuilding your credit after bankruptcy can be difficult. With focused effort, you can rebuild your credit score over time.
Dont expect to rebuild your credit overnight. Start with small steps. Open a new credit card account and pay it off in full each month. If you have any debts that werent discharged via bankruptcy, like your student loans, make an effort to pay them down now.;Every step will take you closer to a higher credit score.
Can I Keep My Home After Filing Bankruptcy
By FindLaw Staff | Reviewed by Maddy Teka, Esq. | Last updated May 19, 2021
The answer, like so many others in law, is that “it depends.” Most people that declare bankruptcy can keep their houses throughout the process, but some are not.
Keeping your home is often the biggest worry about filing for bankruptcy â and which Chapter to file for. This article will give you some useful information so you can know what to expect.
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If Youre Having Trouble With Your Mortgage Payment
Its probably best to start by talking about what to do if youre having trouble with your mortgage. Its our expertise, but also for many people, its their single biggest monthly expense. If you find yourself struggling, you have a few options for mortgage help.
The most preferable option for most people might be to look at a modification. A mortgage modification involves temporarily or permanently lowering your interest rate and/or extending your term so that you can more easily afford your monthly payment.
If youve been over things with your servicer and can afford to make a payment at all, one option might be a short sale. In this scenario, you might know you cant sell your home for what you owe on your mortgage. However, if you can prove hardship, your lender might be willing to let you do a short sale where they work with you to sell the property for less than what you are.
Depending on state law, a lender may be able to go to court and get a judgement against you for the difference between what the property sells for and what you actually owe, so thats something to be aware of.
Finally, your lender could approve a deed in lieu of foreclosure. Under this arrangement, you sign the property over to your lender and they then sell the home. In exchange for keeping the home in good shape, your lender may forgive some or all of the difference between what you actually owe and what the property can be sold for.
Traditional Or Prime Insured Mortgage:
To qualify for a traditional mortgage, which may give you the best rate, you must meet the following requirements:
- have been discharged from bankruptcy for at least;two years and one day
- have at least;one year;of re-established credit showing on;two;credit items usually with a minimum combined credit amount of between $2,500-$3,000
- have a minimum down payment of 5% for the first $500,000 of your purchase, 10% for any amount over $500,000
- if your down payment is less then 20% down you must have mortgage insurance available through Canada Mortgage and Housing Corporation
- your minimum LTV is 95%
- your maximum TDS is 44%
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How Bankruptcy Can Affect Your Ability To Get A Mortgage
Bankruptcy can significantly lower your credit scores, remain on your credit reports and affect your ability to obtain credit, including a mortgage loan, for up to 10 years. Fortunately, its impact lessens over time.
For a lender to even consider you for a mortgage after bankruptcy, your bankruptcy must be discharged. A bankruptcy discharge is a court order that eliminates your debts. In addition to making sure your bankruptcy has been discharged, a lender will look at your credit report to determine your creditworthiness.
It’s a good idea to check your credit report before you apply for a home loan to make sure it’s accurate. Look for mistakes such as incorrect or outdated information or accounts that were not included in your bankruptcy filing that are listed as part of it. Be sure to contact the credit agency as soon as possible and dispute any errors you find.
When you do begin to apply for a mortgage after bankruptcy, your lender will likely ask you a few questions about your bankruptcy. They may ask you when your case was discharged, what you’ve done to establish new credit, and how you’ve been keeping up with your bills. It’s a good idea to have the answers to these questions ready beforehand so that the application process runs smoothly.
Let’s dive deeper into how each type of bankruptcy can affect your ability to get approved for a mortgage.
When Bankruptcy Is The Best Option
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Bankruptcy isnt the end of the world. It may even be good for you.
Bankruptcy stops collection calls, lawsuits and wage garnishments. It erases debt. And despite what youve heard, bankruptcy may help your credit scores.
But thats not the whole story.;Most people struggle so long with their debt that their credit is already battered by the time they file for bankruptcy. And once they do, their scores typically rise, not fall. If the debt is erased which is known in bankruptcy court as a discharge scores go up even more.
Within a year, youre way better off, says Jaromir Nosal, assistant professor of economics at Boston College, who co-authored a study for the Federal Reserve Bank of New York about the effects of bankruptcy. Its a pretty rapid rate of recovery.
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Mortgages And Debts Secured On Your Home
Youll need to keep paying your mortgage and any other debts secured on your home – for example, debts secured with a charging order. If you fall behind with the payments, bankruptcy won’t stop your mortgage lender from taking steps to repossess your home.
If you have an income payment agreement or income payment order , tell the official receiver you need to keep paying a secured debt. Ask them if you can pay less under the IPA or IPO so you can keep paying the secured debt as well.
If your home is repossessed and sold, but doesn’t raise enough money to pay off your outstanding mortgage or any other debt secured on it, the remaining debt known as ‘mortgage shortfall’ will no longer be secured. This means you’ll be released from it at the end of your bankruptcy. You’ll also be released from a mortgage shortfall if your home is sold at any time, even after your bankruptcy has ended.
Write A Letter Of Explanation
Write a letter to explain the circumstances surrounding your bankruptcy and submit it with your mortgage application. Make sure you detail any underlying problems that led to the bankruptcy and explain how youve dealt with them to make sure the same situation doesnt arise in the future.
Lenders make their money by making loans, so any context you can provide may go a long way toward getting yourself approved.;
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Joint Debts In Bankruptcy
Debt problems cause stress for the entire family. One of the common concerns is how will bankruptcy affect my spouse if I declare personal bankruptcy? Do creditors pursue your spouse? Will it affect their credit rating?
To understand how bankruptcy will affect your spouse, it is important to understand the difference between joint debt and personal debts.
Personal Debts
Your bankruptcy only affects your debts. As long as your debts belong solely to you, then claiming bankruptcy should have no impact on your spouse or their credit rating, but sometimes the answer is not quite that simple.
Joint Debts
If your spouse has not co-signed or guaranteed any of your debts then those debts belong solely to you.
However, if they have guaranteed or co-signed any of your debts, those debts are no longer just yours. Now your spouse will become fully liable if you file for bankruptcy. Your creditors will pursue your spouse for full payments, even though your bankruptcy will eliminate your responsibility to repay the debt.
In situations where you have significant common or joint debts, your spouse may need to declare bankruptcy if your spouse cannot afford to repay those debts on her own. It is possible to declare a joint bankruptcy or joint consumer proposal with your spouse. This can lower the overall cost of these proceedings for the two of you.
Homestead Exemption: Is Your Home Exempt In Bankruptcy
All of this may be moot if a significant portion of your home equity is not covered by a bankruptcy exemption. In Chapter 7 bankruptcy, most or all of your debts are discharged. In exchange, the trustee is entitled to sell your nonexempt property and use the proceeds to pay your unsecured creditor. That means that if your home has a significant amount of nonexempt equity, the trustee will sell it. To learn if your home has nonexempt equity, see Chapter 7 Homestead Exemption.
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Conventional Loans Have Stricter Terms For After
Conventional loans are not government-insured, so interest rates and credit score requirements tend to be higher than those for a government-backed mortgage like an FHA loan. For example, you can get an FHA loan with a credit score of just 500 (assuming youre willing to put down a 10% down payment, or 580 if you only want to put down 3.5%. By contrast, conventional mortgages usually require a minimum score of 620.
According to Jeremy Schachter, branch manager at Fairway Independent Mortgage Corporation in Phoenix, Ariz., some lenders offer niche refinance loans that dont require a waiting period, but these are adjustable-rate mortgages that come with higher fees.
The majority of people fall in the FHA or VA loan buckets, he said. It doesnt make sense if youve been through a bankruptcy to go with a loan with higher rates and fees.
Getting Ready To Buy A House After Chapter 7
While you are waiting to qualify for a home loan after bankruptcy, there are several things you can do to improve your chance of qualifying for a lower interest rate and better terms.
Ways you can improve your chances of purchasing a home after Chapter 7 include:
- Increase savings for a larger down payment on the home. A larger down payment can help you qualify for better loan terms. Also, having an emergency savings account can help avoid missing mortgage payments because of an emergency.
- Improve your credit score by making all payments on time. Late payments on credit cards and other debts lower your credit score quickly. Review credit reports and correct mistakes to improve credit scores. Apply for a secured credit card that reports your efforts to use good credit habits to the credit reporting agencies.
- Practice personal budgeting habits. Create and live by a household budget to help improve your financial management skills.
- Work with the lenders and be honest about your financial history. Write a letter explaining the need to file bankruptcy, especially if you had to file bankruptcy because of an illness, accident, loss of a spouse, or unemployment. Explain how you have improved your finances and have a plan to handle emergency expenses in the future.
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Should I Declare Bankruptcy
Before you choose to declare bankruptcy, take a closer look at your debts. Determine which debts could possibly be discharged via bankruptcy. Think about a realistic repayment timeline with your current strategy. Look into getting very serious about repaying your debt through either the avalanche or snowball method.;
If repaying your debt will take years or decades, you should consult with a financial professional or bankruptcy attorney. They may be able to help you determine whether or not bankruptcy is a good idea for you.;
If You Have Multiple Mortgage Loans
Under Chapter 13, a borrower who has multiple mortgage loan on the same house can get all but the primary categorized as unsecured debt. That means they go into the category thats covered by your ability to pay, and likely wont have to be paid back in full. This only comes into play if you owe more on the house than its worth.
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Check Your Credit Report
Lenders look at your credit reporta detailed report of your credit historyto determine your creditworthiness. Although bankruptcy filings can remain on your credit report for up to 10 years, it doesnt mean you have to wait 10 years to get a mortgage.
You can speed up the process by making sure your credit report is accurate and up;to date. Its free to check: Every year, you are entitled to one free credit report from each of the big three Equifax, Experian, and TransUnion.
A good strategy is to stagger your requests, so you get a credit report every four months . That way you can monitor your credit report throughout the year. One of the best credit monitoring services could also be useful in this endeavor.
On your credit report, be sure to watch for debts that have already been repaid or discharged. By law a creditor cannot report any debt discharged in bankruptcy as being currently owed, late, outstanding, having a balance due, or converted as some new type of debt . If something like this appears on your credit report, contact the credit agency right away to dispute the mistake and have it corrected.
Other mistakes to look for:
- Information that is not yours due to similar names/addresses or mistaken Social Security numbers
- Incorrect account information due to identity theft
- Information from a former spouse
- Outdated information
- Wrong notations for closed accounts
- Accounts not included in your bankruptcy filing listed as part of it
What Happens To Your Mortgage When You File Chapter 13
Chapter 13 Bankruptcy is more like a structured repayment plan than a wipeout of all debts, and thus a very different species from Chapter 7 Bankruptcy. With Chapter 13, you file a plan with the bankruptcy court detailing how you will repay your creditors. The bankruptcy trustee reviews the plan, ordering some debts to be paid in full, some to be paid in part, and possibly a handful to be forgiven.
Chapter 13 Bankruptcy does not affect your home mortgage, so you can file for bankruptcy and keep your house in Texas. You continue to make your mortgage payments during and after the bankruptcy, ie., there is no Chapter 13 discharge of mortgage debt in the traditional sense.
If you have fallen behind in mortgage payments, you have the option of paying mortgage late while in Chapter 13 and you can add the arrearage to the Chapter 13 repayment plan, which typically lasts from three to five years. Chapter 13 and mortgage payments thus have a different relationship than Chapter 7 and mortgage payments, which does not allow for the accumulation of arrears and allows for the discharge of mortgage debt.
Do You Have to Reaffirm a Mortgage in Chapter 13?
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Getting A Mortgage After Bankruptcy: Waiting Periods
Understand itll take time to rebuild the trust needed for lenders to consider your application. In most cases, the soonest Rocket Mortgage®;can help you refinance your house or get into a new one is 1 year after the discharge or dismissal of your bankruptcy.
The length of the waiting period depends on the type of bankruptcy you filed and the type of loan you want to get.
What Are Usda Loans
USDA loans are backed by the U.S. Department of Agriculture for low-and-middle-income borrowers who may not qualify for a conventional loan. The mortgages have low down payments and no closing costs for those who buy a home in a qualifying rural area, which includes about 97% of the U.S. A borrowers income cant exceed 115% of the median income for the area. Mortgages are 30-year, fixed-rate.
While the USDA doesnt set a minimum credit score, most lenders who process USDA loans require a minimum of 640.
Waiting period for applicants who have filed for bankruptcy:
- Chapter 7 Eligible three years after discharge.
- Chapter 13 Eligible after 12 months if theyve stuck to their plan payments.
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Chapter 13 Waiting Periods
For a Chapter 13 claim, you can apply for a new FHA loan 1 year after dismissal. Thats if you have made court ordered payments on time and have received written permission from the court overseeing your case.
Your application must go through manual underwriting and the lender must be satisfied with your explanation of what led to bankruptcy and why it wont happen again. Once 2 years have passed since discharge, you are able to apply for a mortgage without manual underwriting.;
