There are two forms of bankruptcy, Chapter 7 and Chapter 13. Chapter 7 bankruptcy requires assets to be liquidated in exchange for the cancellation of debt. Which means, whatever is owned by the debtor is sold in an attempt to pay off the creditors.
In Chapter 13 bankruptcy, however, a payment plan is established and monitored by the court until the debt-holder is able to get free from their debts. Those with regular income can file Chapter 13 bankruptcy and regular payments are assigned to pay off their creditors over the next three to five years.
When someone is clear of their debts they are discharged from their creditors. Becoming discharged from debt means that you are no longer legally required to pay any remaining debts. In terms of home buying, your ability to qualify for a mortgage is determined by how long you have been discharged from bankruptcy and that minimum length of time depends on the type of loan.
Post-Bankruptcy Home Loan Requirements
Every mortgage is different, and receiving a home loan after bankruptcy can depend on your credit score, how long you have been discharged, and your debt-to-income ratio.
Conventional mortgages are not backed by the government and they have the most stringent requirements after bankruptcy. If you have filed for Chapter 7 bankruptcy, there is a waiting period of at least four years after discharge. Chapter 13 bankruptcy requires you to wait at least two years after discharge or four years after dismissal. In addition, they may require higher credit scores and larger down payments.
FHA loans are mortgages backed by the Federal Housing Administration, and they were created to make home buying easier for middle and low-income families. If you have filed for Chapter 7 or Chapter 13 bankruptcy, the legal waiting period requirement for FHA mortgages is at least 2 years. For both Chapter 7 and Chapter 13, your credit history after bankruptcy will be thoroughly reviewed and considered. Our mortgage experts can walk you through the process and help you determine if an FHA loan makes the most sense for you.
VA loans are guaranteed by the United States Department of Veteran Affairs and are available to United States military service veterans. VA mortgages, like FHA loans, require a minimum 2 year waiting period after the bankruptcy discharge. In addition to the waiting period, there are credit score requirements on a VA loan. Applicants may also be asked to provide a debt-to-income ratio. A lower credit score or high debt-to-income ratio might disqualify you for a VA loan, especially after filing for bankruptcy.
Where Do I Start?
It may seem daunting to apply for a home loan after bankruptcy, but there are three things to consider before applying for a mortgage:
- Wait – Take stock of your financial situation.
- Save – Make sure you have enough funds for the expenses a home brings.
- Plan – Put a plan in place so that you can handle whatever may come your way. It’s also important to avoid any derogatory credit or collections after a bankruptcy.
Bankruptcy can affect your credit for up to 10 years. This makes it crucial to know where you are financially. Make sure that you have enough money saved for a larger down payment and for unforeseen expenses that may arise. The larger your down payment is the easier it may be to secure a mortgage.
Remember that homes come with extra expenses and upkeep. Having extra money saved away will help down the road. If you feel ready to own a home, we are here to help. Please contact one of our mortgage professionals and we will work with you to help you secure the loan you need to get into your dream home.