Reducing A Mortgage In Chapter 13 Bankruptcy
Can someone really reduce a mortgage balance in Chapter 13? Absolutely. But it’s not easy. Here’s how lien stripping and loan cramdowns work in Chapter 13.
- If the mortgaged property is your residential home, and you can prove that you owe more than your home is worth, you can strip off a wholly unsecured junior loan. A loan is unsecured if, after selling the house, not one penny would be available to pay the stripped loan.
- If the mortgaged property isn’t your residence, such as a rental property, the rule is a bit different. You can reduce the mortgage amount to reflect the property’s value. Butand this is a big oneyou must pay off the entire reduced balance in the repayment plan.
These options are tricky and require you to present admissible evidence at a motion hearing or adversary proceeding. A local bankruptcy lawyer can help you determine whether your property would qualify for a balance reduction.
What If My Court Wont Let Me Reaffirm The Mortgage
Judges who refuse to approve reaffirmation agreements for real estate mortgages often do so out of concern for the filer. After all, there is nothing in the bankruptcy laws that requires a reaffirmation for your home loan. They do this to protect filers from the potential disaster if they canât make the mortgage for some reason going forward and might get stuck with a deficiency balance.
How Long Should You Wait Before Applying For A Mortgage After Bankruptcy
Theres no set time, but its a good idea to wait until your credit rating is back to a reasonable score. This will ensure you can prove you are able to make repayments for credit products on time and in full.
Your bankruptcy will remain listed on your credit report for six years from the date you were made bankrupt. Even when it has been removed some mortgage lenders may still ask if you have been made bankrupt in the past which you must answer truthfully. This can impact your chances of getting a mortgage and so is something to bear in mind.
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Guide To Buying A House After Bankruptcy
If youve had to declare bankruptcy, you may feel like youll never be able to get your finances in order again. And worse, you may feel like youll never have a house of your own again.
But the reality is that bankruptcy isnt a permanent mark on your financial record. Although your credit score will plummet when you declare bankruptcy, the Consumer Financial Protection Bureau found that those who declare bankruptcy often have higher credit scores when compared to those who try to work out difficult finances without resorting to bankruptcy.
How Does Bankruptcy Work
If your application, or your creditors application on your behalf, for bankruptcy is accepted then your assets would no longer be considered yours and your bank or building society account would be frozen. There are exempt goods, like everyday household items and things you need to work, such as your computer or car.
Someone will be appointed to manage your bankruptcy, either an official receiver or an insolvency practitioner. This person will be your trustee and will handle your assets and bank accounts.
Your assets could be sold to help your creditors reclaim some of the money you owe. You might also need to make monthly repayments from spare income, but only if you can afford to do so. If your trustee decided you can afford it, this could become an Income Payments Agreement and can last for up to 3 years.
While youre in a bankruptcy order, there will be restrictions you need to follow. You cannot:
- take out more than £500 in credit without declaring your bankruptcy
- direct a company without court permission
- create, manage or promote a company without permission
- manage a business with a different name without declaring your bankruptcy
- work as an insolvency practitioner
A bankruptcy order usually lasts a year, after which you should be discharged. This would give you a fresh start, effectively meaning would no longer owe the debts included in your order and your creditors wont be able to chase the money you owed.
What Happens After Bankruptcy
Once you legally file for bankruptcy, your creditors should no longer phone you or sue you and any existing garnishees are lifted. An appointed Licensed Insolvency Trustee will distribute money to your creditors from your non-exempt assets and surplus income. The bankruptcy process typically lasts between 9 and 21 months.
Can I Get A Mortgage After Chapter 7 Bankruptcy
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In a Nutshell
Yes, you can get a mortgage after a Chapter 7 bankruptcy. Lenders have their own requirements and waiting periods.
Written byAttorney Eva Bacevice.
Yes! You donât have to give up on the American dream of becoming a homeowner just because you filed a bankruptcy. You can absolutely get a mortgage after a Chapter 7 bankruptcy. The larger question is when are you able to qualify for a mortgage, which can vary based on the type of loan you are pursuing.
In general, for most loans you are eligible two years after you receive your discharge in a Chapter 7 case. Below weâll examine the different types of real estate loans and their guidelines, and offer suggestions for steps you can take to best prepare for your home purchase.
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Buying A Home Using Conventional Loans After Bankruptcy
Conventional loansthose made by banks and mortgage companies without government backingare often sold to the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation . Fannie Mae and Freddie Mac set borrower guidelines for the mortgages they’re willing to purchase. Although a lender might be more lenient in its qualification criteria, most private lenders will respect the guidelines to make their mortgages sellable. Here are the waiting periods after bankruptcy.
- Chapter 7 bankruptcy. If the bankruptcy were due to your financial mismanagement, you’d have to wait 48 months, but if the bankruptcy were out of your control, you’d be eligible after 24 months.
- Chapter 13 bankruptcy. You must wait 24 months after discharge. If the court dismisses your case without a discharge, the waiting period will increase to 48 months. If, however, you can show that you filed the case under extenuating circumstances, you’ll only have to wait 24 months.
- Multiple bankruptcy cases. If you’ve filed more than one bankruptcy in the last seven years, it will be five years before you’re eligible, or three years if you can show extenuating circumstances. But this is still shorter than the seven years Fannie Mae requires after a foreclosure.
Also, keep in mind that Fannie Mae expects you to work toward rebuilding your credit during the waiting period.
How Do I Increase My Chances Of Being Approved For A Mortgage After Bankruptcy
Getting a mortgage after bankruptcy can be difficult but not impossible, with many highstreet lenders declining applications with previous bankruptcy. Our specialist brokers and the lenders they work with believe that everyone deserves consideration, and could help you find a mortgage even after bankruptcy.
Some lenders will consider your mortgage application immediately after youre discharged. Others might require you to have been discharged for at least 12 months, if not for several years. The main issue facing borrowers is their deposit amount. The longer since your discharge, the more likely a lender will be to accept you for a higher Loan to Value product.
Speak to us today about your situation and we can advise on the right path for you.
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Mortgage After Bankruptcy With An Alternative Mortgage Lender Or B Lender
An alternative lender will work with you as early as one day after your bankruptcy discharge, and with little or no re-established credit. However, in exchange for this flexibility, what they will look for is the following:
1. Your down payment will need to be at least 20% of the purchase price of your home. If you have 25% down, or more, that will give you more options. In Mississauga, Etobicoke, and the Greater Toronto Area, this can be a sizeable chunk of cash, so youll want to be prepared.
2. Your costs will be higher with a B lender than with a mainstream lender. First, your interest rate will be a bit higher how much higher depends on the big picture of your overall financial situation, how large your down payment is, and how good your re-established credit is. You can expect to add at least one percentage point over mainstream rates, possibly more. Second, you can expect to pay a lender commitment fee typically around 1% of your mortgage value similar to the Genworth or CMHC mortgage insurance fee mentioned above. If your down payment is more than 20%, you might be able to add the commitment fee to your mortgage rather than paying this out of pocket, but this is up to the lender.
Keep in mind that your alternative mortgage lender or B lender is exactly that: an alternative, or a stepping stone to get you where you want to go.
Fha Loan After Bankruptcy Yes You Can
Borrowers that dont qualify for a conventional loan can pursue the option of FHA loans, which are less strict compared to conventional loans. Requiring a lower down-payment and accepting even a bruised credit score, FHA are deemed as easier to qualify for compared to conventional ones.
Borrowers with a past event of Chapter 7 or Chapter 13 bankruptcy will still be able to qualify for an FHA loan if they meet the requirements related to the necessary waiting period and requirements related to credit score and other FHA loan requirements.
Here are the general requirements for borrowers with a past bankruptcy event in their financial history:
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How Long After A Chapter 7 Can I Buy A House
If youre reading this, theres a good chance youve filed for Chapter 7 bankruptcy. Its during Chapter 7 that the court wipes away ones debt, leaving them with less than ideal credit.
You will need to wait at least four years after your bankruptcy is dismissed or discharged before qualifying for a mortgage. Not sure you can wait for that long? Then look into requirements for government-backed programs such as FHA, VA, and USDA loans. You may be able to obtain a mortgage with one of these loans in just a few years following the discharge or dismissal of your bankruptcy.
Build A Spending And Savings Recovery Plan
As you rebuild your credit, look at your financial situation and assess how much money you need to live on and how much debt you need to repay . Once you determine these amounts, you can come up with a feasible plan to pay your debts and save for your down payment. Perhaps the best way to analyze your situation is to create a monthly budget not just in your head, but on paper or on your computer.
Creating a visual may help you better analyze your situation. For instance, you may be better able to identify areas of spending that are excessive for your income level. If you can lower your expenses, you can increase the monthly amount devoted to a down payment. To get started, you’ll need to calculate your monthly net income and consider the various categories of living expenses outlined below. For each type of expense, assign a monthly amount of money to that category. Pull out your paystubs, checkbook ledger and credit card statements to calculate your income and expense history.
When you eventually purchase a new home, your emergency fund is essential for covering the inevitable unplanned house repairs, such as a new roof, new appliances, structural repairs or flood damage. Saving for a down payment gets you through the financing process of a mortgage approval, but saving for an emergency fund can help get you through the downs of homeownership.
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How Soon Can I Qualify For A Mortgage After Bankruptcy
Kyra Baker is a fact-checker with nearly 10 years of experience working and assisting on editorial projects within the culture, arts, and publishing spaces. For the past eight years, she has worked as a fact-checker at Art Papers Magazine, an Atlanta, Georgia-based art magazine. Kyra has also fact-checked and edited for The Rosarium Publishing, the publishers of the science fiction anthology, “Mothership: Tales from Afrofuturism and Beyond.”
Filing bankruptcy doesnt mean youll never qualify for a mortgage. One reason to file a bankruptcy case is to eliminate burdensome debt so you can get a fresh start. Some lenders, such as credit card and even certain car loan creditors, will take a chance on you right after you emerge from bankruptcy.
Mortgage lenders and guarantors want to ensure they wont compromise resources by lending to someone whos not ready for the responsibility of home ownership. Therefore, they usually wont approve loans right after the borrower gets a bankruptcy discharge. There could be a waiting period of up to 5 years.
Youll pay a higher interest rate, and the terms may not be as favorable as you like, but some for most former bankruptcy debtors. Mortgages are a different story.
Chapter 7 Bankruptcy And Mortgages
The goal of filing for Chapter 7 bankruptcy is to have your debts discharged so that creditors can no longer take collection action against you. While the automatic stay temporarily stops creditors from hounding you, a bankruptcy discharge makes that protection permanent and gives you a legal mechanism to enforce the protection. You can sue creditors that try to collect on discharged debts.
A mortgage, although âsecured,â is still a debt and thus may be discharged like the rest. Once forgiven, you are âabsolvedâ and no longer personally responsible for paying the mortgage. Reaffirmation agreements, on the other hand, keep filers personally liable for making mortgage payments, even after a discharge. They essentially revive the mortgage as if the person had never filed for bankruptcy.
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Waiting Periods To Buy A House After Chapter 7
After a bankruptcy is discharged, it will take time to build your credit and savings back up to homebuying level. And lenders want to know your financial situation has fully recovered before theyll approve you for a new mortgage.
As such, lenders enforce a minimum waiting period or seasoning period before borrowers can apply for a mortgage after bankruptcy.
The minimum waiting periods to get a mortgage after Chapter 7 are as follows:
- FHA loan 2 years
- USDA loan 3 years
- Conventional loan 4 years
Note: these are the minimums required by each loan program. Some lenders will require you to wait longer.
For example, some lenders will ask you to wait 3 years before applying for an FHA loan rather than the 2year minimum required by the Federal Housing Administration.
There are some rare situations where borrowers can get approved before the 2year mark, which we describe below. But for most prospective home buyers, these minimums will be strictly enforced.
Take the time to get your credit score as high as possible and save for a bigger down payment. Both strategies will help you get a lower mortgage rate and a more affordable home loan when you do buy.
When does the waiting period start?
Understand that the 2 to 4year waiting period after Chapter 7 bankruptcy doesnt start until a court discharges or dismissed your bankruptcy.
Thats at the end of the bankruptcy proceedings typically 46 months after you first file.
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.
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