Buying A House After Bankruptcy
Can I buy a house after bankruptcy? It is a common question trustees are asked. Most people are not able to afford to purchase a home outright and need to know how to get a mortgage after bankruptcy. The key is to ensure that you receive a discharge from the bankruptcy and that you are working on re-establishing your credit. Canada Mortgage and Housing Corp. will review your application as early as 18 months 2 years after discharge if you have re-established your credit. Therefore, it is possible to get a mortgage post-bankruptcy.
Getting A Mortgage After Bankruptcy: What You Need To Know
Edison Financial | May 6, 2021
If youve ever contemplated bankruptcy, then you know the major concern for most people is how it will affect your mortgage. Bankruptcy is an unfortunate reality for many people, but it doesnt mean youll never own a home again. Whether youre considering filing for bankruptcy or youve already done so and want to learn more about your next steps toward homeownership, weve got you covered.
Fha And Va Standard Loan Requirements
Both FHA and VA guidelines carry similar standard waiting periods for mortgage after bankruptcy. These can change depending on your circumstances .
You can apply for an FHA loan or a VA mortgage after your Chapter 7 bankruptcy has been discharged for two years.
Chapter 13 bankruptcies are viewed a bit differently. FHA and VA allow homeowners to apply for a mortgage while they are actually still in bankruptcy. At least one year must have passed since filing, and applicants must have made at least 12 ontime bankruptcy payments. The bankruptcy court or trustee must also approve the new mortgage.
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Buying A House After Chapter 7 Bankruptcy
If you had a bankruptcy discharged a year ago or more, you might be starting to get your finances back in order. Maybe youre even thinking about buying a house.
But theres a waiting period before you can take out a mortgage usually at least two years. And lenders will be looking closely at your credit score, credit reports, bankruptcy discharge details, and other factors to ensure you qualify.
Tread carefully after bankruptcy and take steps to improve your credit. With hard work and patience, youll eventually be able to get a home loan.
What Are Conventional Loans
Conventional loans are those originated by banks, credit unions and online lending sources.
They are not guaranteed by the government, but they typically have the best interest rates and terms, which means lower monthly payments. The most common type of conventional mortgage is 30-year fixed-rate, which accounted for 79% of mortgages between 2019 and 2021, according to ICE Mortgage Technology.
Conventional loans require a credit score of 620 or higher. The higher the score, the better the terms. One of the biggest advantages is that a down payment of 20% means you dont have to pay private mortgage insurance, which can add thousands to a mortgage.
Even if you dont put down 20% at the closing, once the equity in the house reaches 20%, the PMI is dropped. With an FHA loan, it never drops, and you have to pay a one-time up-front premium of 1.75% of the base amount of the loan.
The waiting period for a conventional loan after bankruptcy is:
- Chapter 7 Four years after discharge date
- Chapter 13 Two years. If the case is dismissed, which happens when the person filing for bankruptcy doesnt follow the plan, its four years.
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Federal Housing Authority Loan
An FHA loan is a federally-insured loan. It’s attractive to first-time, cash-strapped home buyers because it offers the ability to put down as little as 3.5% of the purchase price.
Additionally, the requirements are more liberal than conventional loans. You’ll likely qualify with a credit score of:
- 640 and 3.5% down
- 580 if you can afford a higher interest rate, or
- 500 and 10% down.
If you’d like better terms, consider taking steps to improve a credit score of less than 640.
How Long After Bankruptcy Can You Buy A House
The waiting period to buy a house depends on whether you filed Chapter 7 or Chapter 13 bankruptcy, and the type of loan you seek. Waiting periods after Chapter 7 is discharged vary from two to four years. After Chapter 13 is discharged, some federal loans are available immediately, though a conventional loan requires a two-year waiting period.
The first step in qualifying for a home loan after bankruptcy is to have the bankruptcy judge discharge your case. Then comes the patience test, and the timeframe is determined by the type of bankruptcy you have and the type of loan you desire.
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Keeping Your Payments Current
Under Canadian bankruptcy law a secured lender, like a mortgage holder, is not permitted to cancel their loan simply because you have declared bankruptcy. If you are up to date with your payments, you can continue to pay your mortgage, even while you are bankrupt.
However, if you are in arrears or , the mortgage holder is not required to allow you to continue with the mortgage. Even if you are not bankrupt, if you are in arrears the mortgage lender can start foreclosure proceedings and sell your house.
How To Improve Your Chances
To get approved for a mortgage after bankruptcy, you need to demonstrate to lenders that you can manage your finances responsibly.
That will require establishing good credit habits and ensuring that youre not overutilizing credit, says Puricelli.
To rebuild your credit more quickly, follow these tips provided by Graham:
- Pay all your bills on time and in full
- Check your credit score and three free credit reports often and dispute anything inaccurate
- Dont take on unsecured debt, like personal loans or credit cards, which will most likely come with high interest rates
- Get a secure line of credit or loan that is backed with a deposit you pay beforehand
Having a friend or relative cosign on new credit lines can also help you qualify more easily and start building new credit.
But this strategy comes with a lot of risk, because the cosigner is agreeing to take over your new debts if you cant pay them. And if the loan goes bad, their credit will take a hit, too.
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Fannie Freddie And Ginnie
Most conventional loans in the United States are owned by or insured by the government-sponsored enterprises Fannie Mae, Freddie Mac, or Ginnie Mae. These backers have similar loan eligibility requirements for borrowers who have filed bankruptcy cases. These are guidelines. Your mortgage lender or mortgage broker can help you with the specifics.
In addition to a waiting period, these organizations require that borrowers demonstrate they have re-established credit after the bankruptcy.
Chapter 7: The waiting period is 4 years, or 2 years with extenuating circumstances . An example of extenuating circumstances would be a layoff and extended unemployment, or medical issues.
Chapter 13: The waiting period is 2 years from discharge and 4 years from dismissal, or 2 years from dismissal with extenuating circumstances.
If you have more than one filing within the past 7 years, the waiting period is 5 years from the most recent discharge or 3 years with extenuating circumstances.
Other Credit Issues And Their Impact On An Mortgage Application
If youve had new credit issues after the bankruptcy this can start to cause problems. Lenders will, of course, consider you higher risk if youve been bankrupt in the past and as weve covered, some will never offer a mortgage, but most of those who do will want to see a clean credit file thereafter.
This also includes ensuring the credit that defaulted as part of the bankruptcy is marked as up to date on the credit file, as often this needs correcting before you make an application.
If youve had new credit issues since your bankruptcy then it depends what they are and how recent. A lot of the bankruptcy lenders will decline if youve had new issues, but there are some that will lend so that you can have a mortgage with a CCJ or a mortgage with defaults.
If, however, youve had other credit issues before the bankruptcy, such as missed payments, mortgage arrears, defaults, CCJs, a debt management plan, and so on, then the bankruptcy is designed to effectively wipe them off as settled.
This then resets your credit file, and following a year of being unable to borrow or take any credit agreement, discharged borrowers can start rebuilding their credit files from scratch.
Make an enquiry and well match you with an expert for a free, no-obligation chat. They have whole-of-market access, meaning that they can find mortgage products that best suit your needs.
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Getting New Credit After Bankruptcy
Itâs actually a lot easier than most people think to get after filing a bankruptcy. Itâs not unusual for people to receive credit card offers shortly after filing bankruptcy. It makes sense when you stop and think about it – one of the factors that goes into determining how credit-worthy you are is how much other debt you are currently carrying.
Once you receive a Chapter 7 discharge, all of the old unsecured debt is gone and so you have increased your ability to pay off any new debts. You do, of course, want to be mindful of your financial situation and make sure your monthly income is sufficient before taking on any new debt. And not all creditors will be quite as quick to offer a loan, especially if itâs for a significant amount like a home purchase.
How Does It Work With A Chapter 13 Dismissal
When you go through a Chapter 13 bankruptcy, you make monthly payments over several years. If you fail to make the payments as agreed, the bankruptcy may be dismissed. In that case, you lose all the protection of a bankruptcy filing, and your creditors can go after you in court.
You may also receive a dismissal if you decide that you dont want to do the payment plan and withdraw your filing.
Conforming lenders treat dismissals of Chapter 13 bankruptcies more strictly than discharges. That is because, if you go through the entire five years and receive your discharge, you still have to wait another two years before you can get a conforming mortgage. That is a total of seven years form your filing date.
If you get partway through and then withdraw your claim or receive a dismissal, Fannie Mae and Freddie Mac extend your waiting period to four years. They believe that this rule is more fair to those who stick out the entire Chapter 13 repayment period.
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What You Need For Preapproval
With or without a history of bankruptcy, youll need good enough credit to get preapproved. Heres what that means for each loan type.
- Conventional Fannie/Freddie mortgage: 620
- FHA loan: 500 with at least 10% down 580 with at least 3.5% down
- VA or USDA loan: No minimum, but you are more likely to get approved with a score of at least 640
Gather these documents before you apply so lenders will be able to quickly make a preapproval decision on your loan.
- Your Social Security card
Tips To Earn A Mortgage Approval After Bankruptcy
If youre trying to get a mortgage after bankruptcy, the first thing youll need to do is get your credit score back on track. Theres no quick fix for rebuilding your credit after a bankruptcy, but your most recent actions have a more significant impact on your credit score than past negative events.
Keep these tips in mind to help your chances at mortgage approval.
Focus on improving your credit. Do what you can to improve your credit before applying for a mortgage after bankruptcy. Your credit score wouldve taken a hit, but you can improve it by paying your bills on time and keeping your credit utilization low. If you plan on getting a mortgage after a Chapter 13 bankruptcy, its crucial to follow your repayment plan as agreed.
Your credit score will play a significant role in your loan costs. Heres a quick look at how a difference in credit score can impact a $250,000 conventional loan with a 30-year term.
As the table illustrates, a 740 credit score can save you more than $68,000 over the life of a 30-year loan.
Apply for credit cautiously. While you may qualify for other forms of debt, such as credit cards or an auto loan, soon after bankruptcy, be cautious about taking on additional debt if you anticipate applying for a mortgage.
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How Long Should You Wait Before Applying For A Mortgage After Bankruptcy
Theres no set time, but its a good idea to wait until your credit rating is back to a reasonable score. This will ensure you can prove you are able to make repayments for credit products on time and in full.
Your bankruptcy will remain listed on your credit report for six years from the date you were made bankrupt. Even when it has been removed some mortgage lenders may still ask if you have been made bankrupt in the past which you must answer truthfully. This can impact your chances of getting a mortgage and so is something to bear in mind.
What If My Bankruptcy Happened Some Time Ago
As each year goes by, your bankruptcy becomes more distant and less relevant in the eyes of a lender. Lenders may offer you better rates and fees, along with approving mortgages with lower deposits.
If youve been discharged from bankruptcy for around four years, then most lenders will view you as no different to anyone else. This is especially true if your credit history has been kept intact since your bankruptcy. This means that after four to five years, you could be eligible for great rates and should only require a 5-10% deposit.
If youre still unsure, our specialist advisors can help you to check whether or not youll qualify for a mortgage.
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Respond To Lender Inquiries
Once you submit your preapproval application, the rest is in your lenders hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If you seem like a good candidate, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.
Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lenders inquiries quickly to improve your chances of approval.
What Happens When I Need To Renew My Mortgage
In most cases, you should be able to make a mortgage renewal after bankruptcy as long as the mortgage payments are up to date. Most banks would prefer to have you sign the mortgage renewal and continue paying it off over a longer period of time, than to foreclose on it at that point and risk losing all the future profits plus an additional amount of money by selling your house at a discounted foreclosure price. Always ask your lender for specific information as policies and procedures can vary.
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Improving Your Credit Rating After Bankruptcy
If you want to buy your own home, youll need to improve your credit rating and show that youre able to manage your debts.
Theres a good chance youll be able to get a mortgage after bankruptcy and fulfil your ambition of owning a property with an improved credit score.
If you want to minimise the long-term impact bankruptcy could have on you, its vital to improve your credit score.
During the bankruptcy process, many people engage in debt management education.
This can be an extremely useful way of learning more about the industry and how people fall into the cycle of debt.
Even if you arent required to undertake these classes, many people find them to be hugely beneficial, so its certainly worth learning more about successful debt management.
After youve filed for bankruptcy, youll have the opportunity to improve your credit rating, if you choose to do so.
To ensure youre able to obtain a mortgage after bankruptcy, youll want to take a strategic approach to enhancing your credit rating and money management.
Following your discharge for bankruptcy, you may want to apply for some form of credit.
Providing you manage this credit effectively it will show potential future lenders that youre able to be a responsible borrower.
This minimizes their risk in lending to you and, therefore, increases the chances of you being approved for a mortgage or an alternative form of credit.
Immediately following your discharge, its likely youll be able to obtain a credit card.
United States Department Of Agriculture Loan
Low- and middle-income borrowers willing to purchase a home in a rural community will benefit from this loan. It offers a low-interest, no down payment option for those who might not otherwise be able to qualify for conventional financing.
Applicants will be eligible for this loan three years after receiving a Chapter 7 discharge. However, if you qualify for the exceptional circumstances exceptionfor instance, by demonstrating that the bankruptcy was beyond your control and not a result of financial mismanagementyou might be able to qualify as soon as 12 months after the discharge.
A Chapter 13 bankruptcy filer can apply after 12 months of successful plan payments, or sooner on a showing of exceptional circumstances. To find out more, visit the United States Department of Agriculture Rural Development website.
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