If you are unable to meet your financial obligations due to unforeseen circumstances and you do not expect an improvement in your financial situation, bankruptcy may allow you to free yourself from the legal option. Many bankruptcies are caused by unique events, such as: loss of employment, unexpected excessive medical bills and divorce. There are strict guidelines for mortgage financing after a bankruptcy. People who have gone bankrupt mistakenly think they will not be able to qualify for a mortgage or refinance their current mortgage. However, depending on the type of loan, a person may be qualified within one year from the filing of the bankruptcy. When applying for a mortgage loan, lenders take into account several factors other than credit ratings, including the following: down payment, employment history, and debt ratio.
There are 2 types of personal bankruptcies in the United States Bankruptcy Code; they include Chapter 7 and Chapter 13. Below is a brief description of each type of bankruptcy and the waiting period to qualify for a mortgage.
The most common type of bankruptcy in the United States is Chapter 7. A person must meet the requirements of the "resource test" in order to qualify for this type of bankruptcy. This option allows any creditor to repossess any property used as collateral for a debt that will be released. The trustee in bankruptcy may also liquidate any non-exempt property and distribute the proceeds to unsecured creditors. There are exceptions to the type of debt that can be paid by the courts. These debts include: (1) tax liens, (2) student loans and (3) spousal and child support. There are also limits (by state) on the number of assets that can be exempted in the event of bankruptcy. This type of bankruptcy can only be used by an individual once every 8 years. Depending on the type of mortgage used, there are different waiting periods after a bankruptcy. For a Chapter 7 bankruptcy, the waiting period is 4 years for a conventional loan, 2 years for an FHA or VA loan and 3 years for a USDA loan after release.
Chapter 13 is the second most common personal bankruptcy. This option allows a person to keep all of their property and assets, but it must also benefit from a payment plan accepted by the bankruptcy court to repay its creditors. The amount of the refund is based on the income, the monthly expenses, the value of the property and the debt paid upon the bankruptcy of the person. Most repayment plans are usually of a duration of 3 to 5 years. Under this type of bankruptcy, monthly payments are made to a trustee who oversees the completion of bankruptcy and release. Unsecured debt and medical bills should not be reimbursed under this option. Depending on the type of mortgage used, there are different waiting periods after a bankruptcy. For Chapter 13 bankruptcy, the waiting period for a conventional loan is 2 years after release, while FHA, VA and USDA authorize funding as soon as the debtor has made payments within 12 months . This is subject to court authorization to obtain a mortgage if the bankruptcy has not been released.
When you apply for a mortgage after the bankruptcy, the lenders will look closely at your credit history after the bankruptcy. It is therefore important to keep all your payments on time. Restoring credit is one of the most important factors after a bankruptcy. You should be actively involved in rebuilding your credit. Check your credit and scores regularly, dispute any inaccurate credit, resolve any outstanding credit, open credit with secured credit cards and / or installment loans, and pay your bills on time. Lenders will ask you for a copy of your bankruptcy schedules and paper discharge; in addition to a detailed explanation letter documenting the reason for the bankruptcy. Lenders will also require that your credit be reinstated without derogatory credit since the bankruptcy. Ideally, a person should have an installment loan and two revolving accounts (credit cards), with a payment history of at least 12 months indicating to the lender that he is able to manage his credit. For revolving credit, it is in your best interest to keep the balance below 30% of the available credit limit. In doing so, you will maximize your credit score. Lenders will use other factors to qualify you for a mortgage after bankruptcy. These include down payments, income, employment history and income stability. For more information on mortgage financing after a bankruptcy, please contact a reputable credit officer.