Many people shy away from exploring debt solutions in bankruptcy for fear that they will never qualify for a mortgage. Credit card companies and debt negotiation companies will have you believe that this is true, however, there is no merit to this assertion. Whether you may get a mortgage after bankruptcy depends on what chapter of bankruptcy you filed, what type of mortgage you are applying for, and whether you meet the other basic requirements when you apply for a loan.
A conventional loan is any mortgage that is not made by a government entity nor insured by a government entity. Conventional loans offer many more options than some of the government-backed loans, however, they also have the longest waiting period. You must wait four years after a chapter 7 bankruptcy discharge and two years after receiving a chapter 13 bankruptcy discharge to meet the minimum requirements. It is important to understand that the clock starts once a discharge (legally eliminating the debt) is received, not when the case was filed. If you have filed a chapter 13 bankruptcy and your case was dismissed, you will need to wait four years from the dismissal date. Along with other minimum requirements (income, down payment, etc), most lender will require a credit score of 620. Some lenders, however, will underwrite a loan with credit scores as low as 580.
An FHA loan is a mortgage insured by the Federal Housing Administration. The federal government insures loans for FHA-approved lenders in order to reduce the risk of loss if a borrower defaults on their mortgage payments. A person who has received a discharge in a chapter 7 or a dismissal in a chapter 13 could qualify for an FHA loan in as little as 1 year. This time-frame further extends to people who have gone through a short-sale or a foreclosure. In order to bypass the normal 2 year wait after a discharge or dismissal, the borrower would need to prove that an economic event occurred and demonstrate the bankruptcy was caused by external economic factors (that are no longer there) which reduced their income by 20% or more for six months. Those interested in an FHA loan should have a credit score above 580. If you score is below 580 you would not be precluded from applying, however you may be required to put a 10% down payment on the loan. For more specific requirements, please contact an FHA approved lender. http://www.hud.gov/ll/code/llslcrit.cfm
VA loans are sponsored by the Department of Veteran Affairs and are exclusively offered to veterans who have served at least 181 days of service during peacetime, 90 days of service during war time, or 6 years of service in the National Guard. Some surviving spouses of veterans who died while in service or from a service-connected disability may also be eligible. The Department of Veteran Affairs does not issue the loan, the agency oversees the program and insures part of the loan if the borrower defaults on their mortgage payment. VA loans offer 100% financing and can be very helpful to someone who is unable to save enough for a down payment or is buying a property that needs a lot of work. In order to meet the minimum requirements for a VA loan after bankruptcy, you must wait two years after your you receive a discharge in your chapter 7 or 13. For more specific requirements, please contact a lender who specializes in VA loans.
If your property, or potential property, is located in a rural area, you may be eligible for a USDA loan from the United States Department of Agriculture. USDA loans are government-backed loans, similar to the FHA loan and the VA loan. In order to qualify for a USDA loan, you must wait three years after you receive a discharge in a chapter 7 bankruptcy or one year after you receive a discharge in a chapter 13 bankruptcy. USDA loans also offer 100% financing and is the only option for a non-veteran to purchase property without putting money down. For more specifics regarding eligibility requirements, please view the underwriting guidelines from the USDA. http://www.rd.usda.gov/files/CA-SFHUnderwritingGuide.pdf
This article is focused mainly on the minimum requirements for various mortgage as they pertain to a past bankruptcy. A borrower must also meet all other mortgage requirements to be eligible for a loan – income, credit score, down payment, etc. If you have recently filed a bankruptcy, it is important to start rebuilding your credit immediately. It is also important to talk to a qualified loan officer or mortgage broker to evaluate the best loan options and establish a game-plan towards home ownership.
Many of the stigmas associated with bankruptcy and future credit/home ownership no longer exist. It is now possible to eliminate overwhelming debt without jeopardizing your future as a home owner. If you are contemplating bankruptcy, please call my office for a free consultation.
Please be aware that this should not be construed as legal advice and certain “minimum” requirements are subject to change.