CAN I GET A MORTGAGE AFTER CHAPTER 7 BANKRUPTCY?

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If you go through Chapter 7 bankruptcy proceedings, a common question that arises is whether you are still eligible to apply for, and obtain, a mortgage. Here is the answer – yes, you can still qualify for a mortgage after a Chapter 7 bankruptcy. Though, it is important to understand that each mortgage lender has its own unique requirements and waiting periods for mortgage applicants with a bankruptcy filing on their record.

Two-Year Waiting Period

Generally, most people will have to wait two years before they are eligible to apply for a mortgage loan after they receive their discharge notice in a Chapter 7 bankruptcy.

Let’s take a look at some of the different types of mortgage loans and the relevant guidelines that apply to applicants with a bankruptcy on their record.

Qualifying for New Credit Post-Bankruptcy

Many people may not realize that it can be relatively easy to qualify for credit after going through Chapter 7 bankruptcy. In fact, it is fairly common for people to receive offers for new credit cards shortly after filing for bankruptcy.

Rebuilding Your Credit During the Waiting Period

Mortgage lenders are generally open to taking a chance on someone after they have gone through Chapter 7 bankruptcy, but most lenders want some assurance that you are able to successfully maintain the payments. Having a waiting period in place is beneficial for both sides. It gives you the chance to rebuild your credit score while lenders can see that you have the ability to assume and maintain a mortgage payment.

The waiting periods will vary depending on the mortgage lender. In most instances, the waiting period will vary from between two and four years following a Chapter 7 bankruptcy.

It is important to note that the waiting period typically commences from the date of discharge, not your original filing date. It is also important to highlight the fact that waiting periods can be extended if you filed multiple bankruptcies or if there is a foreclosure on your record. Nevertheless, many mortgage lenders will be open to reducing the waiting period if you are able to show that you filed your bankruptcy due to extenuating circumstances that were beyond your control and not related to financial mismanagement.

Understanding the Types of Mortgages

There are two main types of mortgages that most people apply for – (i) government-backed mortgage loans and (ii) conventional loans. Let’s explore each type of mortgage loan.

Government-backed Mortgage Loans

Government-backed loans are mortgages securitized by the federal government. Basically, this means the government is protecting the lender in the case of a payment default. A government-backed mortgage loan requires a specific waiting period after a bankruptcy filing.

Federal Housing Authority (FHA) Loans

FHA loans are quite popular for first-time homebuyers and individuals with a less than perfect credit history who would have a more difficult time qualifying for a conventional loan. With FHA loans, the federal government will guarantee a loan that is obtained through a private lender. This means if a borrower defaults, the Federal Housing Administration steps in to protect the lender.

Some of the hallmarks of FHA loans include less stringent credit score requirements and lower down payments. For example, it is quite common for borrowers to be eligible to apply for an FHA mortgage by putting down only 3.5 percent of the purchase price, as opposed to traditional mortgages that usually require a 20 percent down payment.

For FHA mortgage loans, the waiting period is typically two years after your bankruptcy discharge. However, if you have evidence of extenuating circumstances, you may qualify for a 12-month exception. For this exception to be approved, you will need to show that you filed for bankruptcy through no fault of your own and that you have a track record of handling your finances well since the bankruptcy.

United States Department of Agriculture (USDA) Loans

USDA loans are available to borrowers who are interested in purchasing a home in a rural area. USDA loans offer low-interest rates as well as a zero-down payment option. The waiting period for a USDA mortgage loan is typically three years after receiving Chapter 7 discharge. Although you can qualify as soon as 12 months after your discharge if you can show extenuating circumstances led to your bankruptcy filing.

Conventional Loans

Conventional loans are private loans made by banks and mortgage companies without government backing. In theory, this means that conventional loans don’t need to follow the government waiting period. However, most of these loans are sold to either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). In order to be eligible for purchase by Fannie Mae or Freddie Mac, there are specific borrower guidelines. Most conventional loans conform to follow these guidelines.

Conventional loans require a down payment and private mortgage insurance (“PMI”) payments until the property equity equals 20% of the initial loan amount. If you can’t put down the full 20% at the time of purchase, you’ll have to pay PMI. Conventional loans usually require higher credit scores.

The waiting period for a conventional loan will vary from between two and four years. Once again, if you have evidence of extenuating circumstances, it can potentially reduce the waiting period to only two years (i.e. 24 months). For conventional loans, an extenuating circumstance is defined as a “nonrecurring event that is beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.”

If you have multiple bankruptcy filings on your record, the waiting period for a conventional loan will typically be longer. Specifically, you will likely need to wait five years from the most recent discharge, though extenuating circumstances can reduce this to three years.

Foreclosure Will Impact the Waiting Period

As mentioned, if your bankruptcy included a foreclosure, the waiting periods referenced above could be extended. In this situation, the waiting period for an FHA loan will typically increase to three years. The waiting period for a conventional loan typically increases to seven years. Both VA and USDA loans remain the same (i.e., waiting periods between two and three years).

Bankruptcy Filing Will Remain on Your Credit Report

It is important to understand that your Chapter 7 bankruptcy filing will remain on your credit report for at least ten years. This is standard protocol for all three major credit bureaus. Nevertheless, your credit score can start to improve as early as your discharge date.

If you decided to file for Chapter 13 bankruptcy, it will remain on your credit report for only seven years after you file for bankruptcy.

The Takeaway

If you went through the bankruptcy process and are now on the other side, it is important to know that the dream of homeownership is still attainable. It just means you will have to wait a little longer and go through additional administrative hurdles to eventually qualify for a mortgage loan.

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