Qualifying for a mortgage loan that would enable you to purchase a home after filing for bankruptcy may seem like a crazy dream. Bankruptcy tends to cast shame or paint a filer as a person who should never be trusted again with borrowed money.
In all actuality, every year somewhere around 800,000 Americans file for bankruptcy. Most of the people that file for bankruptcy are those that had the best intentions and were very responsible with their money. Life is unpredictable and sometimes it can leave a person with large and unforeseen financial struggles as a result of circumstances beyond our control. Sometimes filing for bankruptcy is the only way out of a blindsiding financial depression. Taking the step of filing bankruptcy can really help those in deep financial trouble get back to a place of health, even to a place where they are able to purchase a home.
To understand how it is possible to purchase a home a home after bankruptcy let’s take a look at types of bankruptcy and how and when to apply for a mortgage after bankruptcy.
Types of Bankruptcy
There are two types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 filers are usually released from paying back unsecured debt. This means credit cards, medical bills, or loans extended without collateral. Chapter 13 bankruptcy requires filers to repay their debt under a new affordable payment schedule set up by the court.
Chapter 13 bankruptcy is looked upon more favorably by lenders than Chapter 7 bankruptcy because the filer is still paying their debts. Unfortunately both types of bankruptcy will negatively impact your credit score, a key factor in qualifying for a mortgage. If you have not yet filed and feel the need to do so, it is a good idea to talk with a bankruptcy lawyer to help you determine which type of bankruptcy is better for you.
How Long After Filing Should You Wait to Buy a Home?
The majority of people that file for bankruptcy will need to wait a period of at least two years before a lender will consider a loan application. Depending upon your personal situation and the type of loan you are applying for, this could be a four-year requirement. It all depends on the lender and their seasoning requirements. This is the amount of time they require to pass after filing.
Fannie Mae has a minimum two-year seasoning requirement for bankruptcy filers. An FHA loan has a seasoning period of just one year. Government backed loans such as FHA or VA will usually have a shorter seasoning period.
Your seasoning period begins from the time you are discharged or dismissed of bankruptcy by the court. The more time it has been seen discharge the less of a risk you are assumed to be.
Improving Your Credit Score After Bankruptcy
When your bankruptcy period is over, raising and maintaining your credit score is key to future financial health. To help you do so, don’t open too many new credit accounts . It is best to start with opening just a few new credit lines and keeping the balance low while making all payments on time to boost your scores back up. If you use this strategy for about a year you may just be at a good place to apply for a loan.
What to Do Before Applying for A Mortgage After Bankruptcy
Before applying for a mortgage make sure to check your current credit score by obtaining a copy of your credit report from the three major reporting agencies. Make sure to check more than just the score and look at the itemized details. You want to make sure there are no reporting errors that are negatively impacting your score. If there is an error you will want to contact the agency that made the report and ask for a correction to be made. Lenders will be looking for every step made to turn bad credit to good credit.
During the loan application process, a lender may request a detailed letter explaining the need to file for bankruptcy. A lender is looking for hardship beyond your control that made it impossible to meet financial obligations. It will take a little more request of financial history details, but if you are open and honest about your past and can prove you are stable and in better financial health now you can qualify for a home loan.
If you would like help applying for a mortgage after bankruptcy please contact me right away.