Tips For Getting The Best Terms Possible
The last thing you want to do when you just get out of bankruptcy is to take out a loan thats bad for the budget. Putting your finances into a tailspin just to get a car is a recipe for disaster. So, you need to take as many steps as you can to get the best terms possible.
These tips can help you get better terms on your loan, for lower monthly payments and less interest paid over the life of your loan.
Fha Loans After Chapter 7 Bankruptcy
Fortunately, you can qualify for an FHA loan following Chapter 7. But be prepared to wait a while before youll get approved.
Bankruptcy will not stop you from making a large purchase, like a home, in the future. So yes, it is possible to obtain an FHA home loan after Chapter 7 bankruptcy, says Jeremiah Heck, a debt and bankruptcy attorney.
Typically, you have to wait for a minimum of two years after your bankruptcy is approved by the courts to be eligible.
But in some cases, the mortgage lender may require additional time.
For instance, some banks tend to ask potential borrowers who filed Chapter 7 bankruptcy to wait a total of three years before they are eligible, adds Heck.
In addition to the waiting period, youll need to meet other FHA loan requirements. These typically include:
- Down payment of 3.5% or more
- Debt-to-income ratio below 50%
- Steady income and employment
- Income source expected to continue for 3 years
Avoiding any new debts after bankruptcy for example, a car loan or personal loan can help your chances of qualifying for an FHA mortgage once the 2-year waiting period is over.
Requirements for other mortgage loan types
An FHA loan isnt the only loan type that can get you on the fast track to homeownership. VA loans also have a minimum waiting period of two years from the date of your Chapter 7 discharge.
To qualify for a VA loan, you need to be an eligible veteran, service member, or member of an associated group .
Buying A Car After Completing A Chapter 7 Is Definitely Possible And Not Uncommon
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The longer that you can wait to make a large purchase after receiving your discharge, the better off you will be. While a bankruptcy does stay on your credit report for 7-10 years, it also erases most of the other dings on your report and allows you tostart rebuilding almost right away.
Following the above suggestions can help ensure that you get the best deal possible. Remember that buying a used car and/or obtaining a car loan that you can afford without financial strain will help to build back up your positive credit after a bankruptcy and help maintain your financial health moving forward.
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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.
*NOTE: FHA, VA, Conventional, and USDA loan requirements are subject to change. Non-QM loans may be temporarily unavailable. As a result of COVID-19, mortgage investors are unable to support as many loans, meaning underwriting guidelines for government and conventional loans are becoming more strict.
Begin Repairing Your Credit As Soon As Possible
There are a few things you can do right away to begin repairing your credit score. The first is to pay all of your bills on time each month so that you can rebuild your payment history.
You should also keep your oldest credit accounts active, even if you dont use them. The length of your credit history accounts for 15% of your score, so this is a simple way to refrain from losing any more points.
Buying a house after bankruptcy is by no means unattainable. It just takes patience and diligence to rebuild your credit score while waiting out the seasoning period.
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When A Second Filing Might Be Beneficial Even Without A Discharge
Sometimes you don’t need a dischargeyou need time to pay off a debt. For instance, suppose that you owed federal taxes that you couldn’t discharge in bankruptcy, and you could not work out a reasonable payment plan. Rather than have your wages garnished, you could file for Chapter 13 bankruptcy and stretch out the payments over a five-year Chapter 13 bankruptcy payment plan.
A similar approach is to file a Chapter 13 case immediately after receiving a Chapter 7 discharge . Again, all you might need is time to pay off nondischargeable debts, such as domestic support arrearagesnot a discharge.
However, not all courts allow the process, and it can be tricky to qualify for a Chapter 7 bankruptcy and then demonstrate that you have sufficient available income to pay into a Chapter 13 plan. It’s possible, though, after taking into account the debts wiped out. In any case, it would be wise to consult with a local bankruptcy lawyer before attempting to go this route.
How Long After Bankruptcy Can You Get A Car Loan
You can get a car loan immediately after filing bankruptcy. In fact, youâll probably get quite a few ads from auto lenders and car dealerships even before your 341 meeting takes place. The key is to be smart about it and if you can, wait before getting a new car loan.
Why does it make sense to wait?
You want to make the most of your fresh start and the best way to do so is by setting yourself up for best loan terms for your auto loan.
Getting better terms, like a lower interest rate, is hard with bad credit and a low credit score. Immediately post-bankruptcy, you likely have bad credit. As a result of your subprime credit rating, the loan terms youâll be offered for this new debt wonât be ideal.
But, youâre also closer to having good credit than you were before your bankruptcy filing. Your bankruptcy filing gives you the chance to build a good credit history. And, good credit = better terms.
For now, if you had a repossession or surrendered your car and need a replacement before you can build up a better credit rating, ask yourself this:
Can I buy a cheap car for cash to get through the next 6 – 12 months?
The car you can afford now may not be pretty, but if it gets you around itâll be worth it in the long run because it buys you time to:
-
rebuild your credit , and
-
save up money for a down payment
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Bankruptcy Normally Lasts For 3 Years And 1 Day From The Day We Accept Your Bankruptcy Form
Your bankruptcy period starts from the day we accept your bankruptcy application. If a creditor makes you bankrupt, the bankruptcy period starts from the date you file a statement of affairs that we accept. In some cases, your trustee can lodge an objection to extend the bankruptcy for up to eight years.
Is It Possible To Get A Mortgage With A Bankruptcy In My Credit History
A bankruptcy will stay on your credit report for several years, and it is true that this will make getting a mortgage more difficult. However, there are lenders out there who will be willing to work with you, particularly if you have been working toward rebuilding your credit during the time period between when you filed for bankruptcy and you applied for a mortgage.
According to John R. Lee, author of How to Improve Your Credit Score: What Everyone Needs to Know, bankruptcies can actually have a very positive influence on your credit score. He further explains, if you enter into a bankruptcy and then make payments on time, your score can go up quite a bit in just a few months.
It is important that you have kept your debts low and have a consistent history of timely bill payments during this time, as that will reflect more positively on how you appear to lenders.
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How Does Bankruptcy Affect Your Credit
Even if youve waited the appropriate seasoning period to apply for a home loan, you still need to repair your credit in order to qualify. Whether youre applying for an FHA loan, a VA loan, or a conventional loan, youll most likely need your score to be somewhere between a 580 and 640.
On the plus side, a Chapter 7 filing automatically wipes out your debt, so your amounts owed category can rebound pretty quickly. This also helps your debt to income ratio when it comes time to apply for a loan.
But a bankruptcy can cause your score to drop as much as 240 points, and it takes time to bring it back up. How long? A Chapter 7 filing remains on your credit report for ten years while a Chapter 13 stays there for seven years.
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.
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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 home-buying 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 2-year minimum required by the Federal Housing Administration.
There are some rare situations where borrowers can get approved before the 2-year 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 4-year 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 4-6 months after you first file.
Purchasing A Home After Filing Bankruptcy
Purchasing a home after filing bankruptcy can be accomplished in as little as two years after discharge, for the same interest rate and down payment as a person who has never filed bankruptcy.
First lets dispel the myth that a person cannot get credit and a mortgage because the record of a bankruptcy is on the credit bureau for 6 years after the discharge.
Its true that a discharged bankrupts record of bankruptcy stays on his credit report for 6 years after discharge.
However, that does not prevent a person from purchasing a home after filing bankruptcy, nor does it stop a lender from lending money to a former bankrupt.
In fact, a person discharged from bankruptcy is a better credit risk because his debts have been erased.
Need Help Reviewing Your Financial Situation?Contact a Licensed Trustee for a Free Debt Relief Evaluation
To be eligible for a mortgage a discharged bankrupt must start to rebuild his credit as soon as he receives his discharge.
Step #1 Check your credit report to identify any errors.
You can request a FREE credit report from Equifax.
Step #2 Contact the credit bureau to correct errors by using this form.
Step #3 Get a secured credit card.
It is new credit you gain after your discharge that increases your credit score and indicates to lenders that you are able to handle credit responsibly.
Make all your payments on time!
Do not use more than 75% of your available credit.
Never miss a payment!
Make your payments on time and never miss a payment.
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Dont Overlook Additional Fees And Expenses
Typically fee includes appraisals, inspections, title processing, and escrow. You have to pay these fees as front expenses, or they turn into your loan. If the prices merge with your loan, the costs may impact your monthly payments and the total interest you pay over the loans lifetime.
Since you are taking a mortgage after bankruptcy, have a thorough look at if the extra fees are affordable for your future goals. You have struggled hard to rebuild your credit to buy a house. And you dont intend to go down under an interest rate of a jumble of fees that you cannot afford comfortably.
You can use the online calculator to search about the impact of your location, credit rating, length, and type of loan on your interest rate, as well as predictable monthly payments.
What Happens To A Second Mortgage During Bankruptcy
In a Chapter 7 bankruptcy filing, your second mortgage probably wont be discharged, which means youre still responsible for repaying it, and the lender can foreclose on your home to get paid.
A Chapter 13 bankruptcy allows for lien stripping, which removes junior liens on your home. Since your first mortgage takes priority, you may be able to have the debt from your second mortgage discharged once you complete your repayment plan and have the second mortgage lien removed. This could be especially helpful if your home is underwater.
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Examine Your Interest Rate Options
Now, lets discuss the nature of the financing. You have two options either to get a fixed-rate or an adjustable-rate mortgage.
With a fixed-rate option, you have to stick to the interest rate available when you sign your loan documents. It allows you to have a regular mortgage payment. But you need to refinance the home loan it if you want a lower interest rate.
Conversely, adjustable-rate mortgages keep changing as per market rate fluctuation. Due to the unpredictability, you would have a much larger monthly payment than you started.
S To Improve Your Credit Scores After Bankruptcy
Theres one thing thats true when applying for a mortgage, whether it comes after a bankruptcy or not credit score is king. The better the score, the quicker you will be approved and the lower the interest rate will be. The interest rate makes a huge difference in your monthly bill, as well as how much you pay over that 30 years.
The fastest way to repair your credit for a mortgage after bankruptcy is to make on-time payments on all debt, and to keep the amount you use to less than 30% of the credit limit, which is the credit utilization rate.
Payment history and credit utilization rate account for 65% of your credit score. Missed payments and overspending with credit cards are credit-score killers.
Other factors are length of credit history, credit mix and new credit. It helps your score if you have a variety of credit and can balance using credit cards youve had for years with using new ones.
The whole thing may seem a little abstract, but if you do the math on a 30-year mortgage the difference between a low and high score brings it into focus. On a $250,000 mortgage, a 3.5% interest rate means a $1,122.61 monthly payment. A 4.5% interest rate would mean a $1,266.71 monthly payment.
Thats a difference of almost $52,000 by the time the mortgage is paid off.
A bankruptcy will cause a credit score to plunge, but there are things consumers can do to lessen the impact.
This comes with a monthly fee, but the reduced interest rate more than makes up the difference.
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Mortgage Options After Bankruptcy
Consumers have multiple options for so-called bankruptcy home loans. Once youve satisfied the waiting period, your next step is to find a lender willing to work with borrowers who have a bankruptcy in their credit history. Fortunately, this isnt as difficult as you may think.
Heres an overview of the loan options and requirements for mortgage approval after bankruptcy.
Conventional loan
Conventional mortgages follow guidelines established by Fannie Mae and Freddie Mac the two main agencies that buy and guarantee most mortgages in the U.S. Conventional loans have either a fixed- or adjustable interest rate, and terms typically range from 10 to 30 years.
Getting approved for a conventional mortgage after bankruptcy requires meeting the appropriate waiting period and demonstrating that youve reestablished your credit. This means paying your bills on time and keeping low balances on revolving credit accounts.
Requirements
- 3% minimum down payment
FHA loan
An FHA loan is a mortgage insured by the Federal Housing Administration. These loans typically offer lending requirements that are more flexible than conventional mortgages. FHA loans are available for 15- or 30-year terms, and rates may be fixed or adjustable.
Requirements
- One- to two-year waiting period
- 580 minimum credit score
- 3.5% minimum down payment
VA loan
Service members, veterans and their families may be eligible for a loan backed by the U.S. Department of Veterans Affairs .
Requirements
USDA loan
Requirements
