Your desire to own a home does not have to be abandoned if you file for bankruptcy; it may materialize as soon as a year after discharge.
The key is to manage your credit well and regain your financial stability. Obtaining a mortgage after bankruptcy involves juggling a lot of different factors. There are various types of bankruptcy in addition to the variety of mortgages that are available, each with their own rules. Both affect how long you must wait after bankruptcy is discharged before you can submit an application for a mortgage.
Another factor is you, including the circumstances that led to your bankruptcy, your post-bankruptcy financial management, and your future financial management plans.
Regardless of how long the waiting period is, use it to complete the tasks that will help you become eligible.
Mortgages that are obtained after bankruptcy may have higher interest rates and be more expensive. Improving your credit score after bankruptcy will help counter that.
Why Is There a Waiting Period for Mortgages After Bankruptcy?
Whatever the reason, declaring bankruptcy shows a lender that the debtor had financial difficulties. Lenders want to be certain that a person who had to make that significant financial decision is now a good risk. The cost of a mortgage is high and the repayment period is lengthy. In order to determine whether a mortgage applicant is a good financial risk, lenders don’t penalize bankruptcy filers.
Dealing with the waiting period, also known as a seasoning period, is the first barrier to home ownership after bankruptcy. Take advantage of that time to restructure your finances and repair your credit. It demonstrates to lenders that you can keep your end of the bargain and make payments on time.
Use the waiting period as an opportunity to demonstrate that bankruptcy does not define you and that you are a person who has managed to improve a difficult financial situation. You’re committed to managing a budget and making payments.
Personal bankruptcy comes in three flavors, with Chapter 7 and Chapter 13 accounting for 99 9% of bankruptcies. Chapter 11 is sometimes, though rarely, used by individuals. Waiting periods differ for each one.
Waiting Period after Chapter 7 Bankruptcy
In order to pay off unsecured debt, such as credit card debt, medical bills, and personal loans, those who file for Chapter 7 must sell their assets.
FHA and VA mortgage regulations for Chapter 7 bankruptcy stipulate a two-year waiting period following the bankruptcy’s discharge. Not when you filed, but at that point, the court released you from your debts. A Chapter 7 discharge usually takes 6-8 months after filing.
Conventional loans have a four-year waiting period, while USDA loans have a three-year waiting period.
Your credit report displays a Chapter 7 bankruptcy for ten years.
Chapter 13 bankruptcy makes it more difficult than Chapter 7 bankruptcy to obtain an FHA, VA, or USDA loan. A Chapter 13 bankruptcy also takes longer to discharge. Chapter 13 enables you to pay back some or all of your creditors over a three- to five-year period. Your remaining debt is discharged once those payments are made. It stays on your credit report for seven years.
After filing for Chapter 13 bankruptcy, there is a two-year waiting period before you can obtain an FHA mortgage. It needs approval from the bankruptcy trustee, who is in charge of managing the creditor repayment plan, and documentation of timely payments made under the bankruptcy plan.
The waiting period for a USDA loan is 12 months of timely plan payments.
There is a two-year waiting period for a conventional loan. The waiting period is four years if the Chapter 13 case is dismissed, indicating that the bankruptcy plan was not followed.
If there were extenuating circumstances that led to the bankruptcy, all of these processes, including Chapter 7 bankruptcy, could be shortened.
Chapter 11 bankruptcy, a reorganization plan typically used by businesses, is uncommon for individuals to file, but it is occasionally an option for people who make more money than what is permitted with Chapter 7 but have too much debt to qualify for Chapter 13 bankruptcy.
Anyone who files for Chapter 11 bankruptcy may do so at any time following the discharge of their debts. However, the lengthy and expensive bankruptcy process may outweigh the shorter waiting time.
Mortgage interest rates after bankruptcy vary depending on the loan and the borrower’s credit rating. Your credit score may decrease by up to 200 points as a result of bankruptcy.
Interest rates go up and down, depending on economic circumstances. For instance, in 2020 and 2021, the U. S. Federal Reserve kept interest rates historically low. Despite rate changes, the difference between the rate for a borrower with a high credit score and one with a low score largely remains constant.
This graph compares interest rates for various loan types and how they change with credit scores starting in 2021:
| FHA | 740 – 2.81% | 640 – 4.09% |
| VA | 740 – 2.87% | 640 – 3.42% |
| USDA | 740 – 2.98% | 620 – 4.09% |
| Conventional | 740 – 3.09% | 640 – 3.46% |
What Are FHA Loans?
Mortgages backed by the Federal Housing Authority (FHA) are available to borrowers who might have difficulty obtaining a conventional loan due to a weak credit history or low income. FHA loans have easier credit requirements and lower down payments.
Since the U. S. Since the loans are backed by the government, lenders are more likely to grant them to applicants with bad credit, though it can be more difficult to find a lender the worse your credit score is.
An FHA mortgage with a 3.5% down payment is available to borrowers with a FICO score of 580. Someone with a 500 score and a 10% down payment can qualify. The interest rate will be higher and finding a lender may be more difficult the lower the score. Although it is possible to apply with a credit score of less than 600, less than 2% of FHA mortgage borrowers had one at the start of 2021.
After filing for bankruptcy without mitigating circumstances, the waiting period to obtain an FHA loan is:
Chapter 7 — Two years from the time of discharge.
If plan payments have been made on time and the bankruptcy trustee grants approval, Chapter 13 — Two years
The FHA’s waiting period is superseded by some banks’ three-year waiting period.
What Are Conventional Loans?
Conventional loans come from financial institutions like banks, credit unions, and online lending platforms.
Although they are not government-guaranteed, they frequently have the best interest rates and terms, which results in lower monthly payments. According to ICE Mortgage Technology, the most popular conventional mortgage is the 30-year fixed-rate, which accounted for 79% of mortgages between 2019 and 2021.
Conventional loans require a credit score of 620 or higher. The higher the score, the better the terms. One of the biggest benefits is that a 20% down payment waives private mortgage insurance, which can significantly increase the cost of a loan.
Even if you don’t put down 20% at closing, the PMI is cancelled once the home’s equity reaches 20%. It never decreases with an FHA loan, and you must pay a one-time upfront premium of 1. 75% of the base amount of the loan.
The waiting period for a conventional loan after bankruptcy is:
What Are VA Loans?
The VA loan program, administered by the U. S. Veterans and active military personnel can get low-cost loans from the Department of Veterans Affairs. The down payment requirement is waived, some closing costs are covered, and mortgage insurance is not required for qualified borrowers.
For those who have experienced bankruptcy, there are a number of requirements in order to qualify for a VA loan.
What Are USDA Loans?
USDA loans are backed by the U. S. Department of Agriculture for borrowers with low and middle incomes who might not be eligible for a traditional loan Those who purchase a home in a qualified rural area, which includes approximately 97% of the U.S., can qualify for mortgages with low down payments and no closing costs. S. The borrower’s income cannot be higher than 115% of the region’s median income. Mortgages are 30-year, fixed-rate.
Although the USDA doesn’t mandate a minimum credit score, the majority of lenders who handle USDA loans demand a minimum of 640.
Waiting period for applicants who have filed for bankruptcy:
How Foreclosure Prolongs a Mortgage Waiting Period
Sometimes a potential mortgage borrower is dealing with more than just bankruptcy. Perhaps a mortgage foreclosure came before the bankruptcy.
The mortgage application process could be lengthened more than it would be with just a bankruptcy, and additional requirements could be added.
The timeline for loan applications following a foreclosure is depicted in the graph below:
| FHA | 3 years |
| VA | 2 years |
| USDA | 3 years |
| Conventional |
|
A sudden, unforeseeable event that resulted in a significant loss of income and/or an increase in financial obligations and was out of your control could lead to bankruptcy. During the COVID-19 pandemic, many people encountered challenging financial circumstances they never would have anticipated. Traditional triggers for bankruptcy include losing a job, having a medical emergency, and getting divorced. The key phrase to keep in mind is “beyond your control”; losing a sizable sum of money due to an unwise investment, an excessive Amazon shopping habit, or any other financial decision you made that sent your finances into a tailspin doesn’t count. You must be able to show that the events leading up to your bankruptcy filing were unavoidable.
Extenuating circumstances may result in a bankruptcy with a shorter waiting period for all types of mortgage loans.
The waiting periods are:
Steps to Improve Your Credit Scores after Bankruptcy
Whether a bankruptcy has occurred or not, one thing is certain when applying for a mortgage: your credit score is king. The quicker you get approved and the lower the interest rate, the better your credit score. The interest rate has a significant impact on both your monthly bill and the total amount you pay over the course of 30 years.
Making on-time payments on all debts, especially credit cards, and keeping your credit utilization rate under 30% are the two fastest ways to rebuild your credit for a mortgage after bankruptcy.
Your credit score is composed of 65% of your payment history and 30% of your credit utilization. Missed payments and overspending with credit cards are credit-score killers.
Longevity of credit history, credit mix, and new credit are additional considerations. Having a variety of credit (mortgage, car loan, student loan) and being able to alternate between using old and new credit cards will improve your credit score.
The entire situation might seem a little hazy, but when you calculate the difference between a low and high score for a 30-year mortgage, it becomes clear. 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.
By the time the mortgage is paid off, that represents a difference of almost $52,000.
Different lenders have different credit score requirements for conventional mortgages, but generally, the score must be at least 620. VA loans also require a 620 minimum. USDA mortgages require a 640 minimum.
FHA loan applicants can have credit scores as low as 500 to 579, but those loans need a 10% down payment; those with credit scores between 580 and 620 need a 3.5% down payment. 5%. The lower credit scores also mean higher interest rates.
Although a bankruptcy will lower a person’s credit score, there are things that consumers can do to lessen the effect.
Get a firm grasp of your finances as a starting point. Make a budget that lists expenses and income. Figure out ways to lower expenses and increase income.
Since FICO and other credit scores place a significant emphasis on credit history and the ratio of debt to available credit, paying your bills on time is the best way to improve your credit score. The best way to combat that is to stop using credit cards, or at the very least, keep your debt to available balance below 30%.
Remember that credit card interest rates can range from 16% to the high-20s and are also determined by credit scores, so using them less and paying them off is a win-win situation.
Nonprofit credit counseling organizations may offer debt management programs that can give you advice on your spending plan, how to reduce your credit card payments, and how to repair your credit.
A debt management plan may be suggested by a credit counseling organization as a means of achieving those objectives. The organization serves as a go-between for you and the credit card companies. They work with card companies to reduce your interest rates. You decide if the lower rate works for you. If so, you pay the credit counseling organization one payment per month, and it distributes the funds to each credit card company in accordance with the predetermined amounts.
Although there is a monthly fee associated with this, the lower interest rate more than makes up for it.
Utilizing a program to assist with credit repair after bankruptcy could be a significant step toward realizing the dream of home ownership.
With the Tampa Tribune and St. Petersburg Times, Joey Johnston has worked as a journalist for more than 30 years. Petersburg Times. His work has appeared in the New York Times, Washington Post, Sports Illustrated, and People Magazine. He has won a dozen national writing awards. He started writing for InCharge Debt Solutions in 2016.
Sources:
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FAQ
What is the Fannie Mae waiting period after Chapter 7?
Bankruptcy (Chapter 7 or Chapter 11): A four-year waiting period is necessary, starting on the date that the bankruptcy action was dismissed or was otherwise discharged. If extenuating circumstances can be demonstrated, a two-year waiting period is allowed. This period is calculated starting from the date the bankruptcy action was dismissed or discharged.
How long after Chapter 7 Can I get an FHA loan?
All borrowers must wait at least two years after the discharge date of a Chapter 7 bankruptcy, as was previously stated. The filing date for bankruptcy should not be confused with the discharge date. FHA regulations mandate that a thorough justification be submitted along with the FHA home loan application, just like with Chapter 13 bankruptcy.
Why do you have to wait 2 years to buy a house after Chapter 7?
Mortgage companies will want proof that your financial situation has fully improved and that you will be able to make your mortgage payments on time. As a result, lenders impose a minimum “seasoning period” before borrowers can submit an application for a mortgage following bankruptcy.
How long after Chapter 7 can I buy a house with a cosign?
Waiting Period after Chapter 7 Bankruptcy People who file for Chapter 7 bankruptcy are required to sell their assets in order to pay off unsecured debt, such as credit card debt, medical bills, and personal loans. FHA and VA mortgage regulations for Chapter 7 bankruptcy stipulate a two-year waiting period following the bankruptcy’s discharge.