How Soon Can I Get A Mortgage After Bankruptcy?
One of the many gloom-and-doom elements of filing bankruptcy is the notion that you will never be able to get a mortgage or own a home again.
One Year: But With Bad Lending Terms
Not true. In fact, you may be eligible for a home loan in as little as 12 months.
You may not like the interest rates available to high risk borrowers that soon after bankruptcy, but there definitely is a chance you could qualify for a home loan.
Two to Four Years: Better Lending Terms
A more realistic view of your loan opportunities is that it will take at least 2-4 years to rebuild your credit score after bankruptcy enough to be in a position to get an affordable home loan, but either way, the message is clear that filing for bankruptcy does not mean your days as a homeowner are over.
“Bankruptcy can actually be a path to home ownership,” said Jeff Badgley, a bankruptcy attorney with more than 20 years of experience. “By immediately eliminating debt that otherwise might take decades to pay off, a family can reset the clock with a fresh start.”
Chapter 7 vs. Chapter 13 and Types of Mortgage Loans
How long you must wait varies, depending on what type of bankruptcy you filed for and what kind of loan you are seeking.
For example, if you are seeking a conventional loan, meaning one from a bank or credit union, you typically must wait four years after a Chapter 7 discharge and two years after a Chapter 13 discharge.
If you are eligible for a FHA or VA loan, the waiting period varies between one and two years, though you must receive debt counseling and provide the agencies an explanation of the bankruptcy.
Also, be sure you understand that the FHA and VA don’t make loans, they only insure those loans. The lending agency (typically a bank) has the final say on loan approval, not the FHA or VA.
Positioning Yourself For Loans After Bankruptcy
Once you know the time frame involved to qualify for a loan, the next step is to make yourself as palatable as possible to lenders.
Bankruptcy wallops most people’s credit score. If your credit score was above 700 before filing for bankruptcy, you can expect to see it drop as much as 200 points. If your score was below 700, you’ll see a drop of as much as 150 points.
Either way, your final credit score is likely to be somewhere in the 500s and that is a poor score, no matter what lender you use, so your first goal should be to take steps that rebuild your credit score.
The good news, according to some bankers, is that they are actually looking for more applications from consumers with credit scores at the low end. Nearly 40% of new purchase home using FHA loans had credit scores between 650 and 699. Another 20% had credit scores between 600 and 649.
According to Ellie Mae, a mortgage analytics service, the average credit score for FHA loans in 2015 was 689. The average for conventional loans was 755. Those could be big numbers to reach if your credit score took 100-200 point hit during bankruptcy.
However, the banking industry claims it’s prepared to give out loans to consumers with lower scores, but the number of applications from people with scores under 680 has diminished to almost negligible.
Steps to Improve Credit Score After Bankruptcy
Chapter 13 bankruptcies stay on your credit report for seven years and Chapter 7 bankruptcies are there for 10 years, but that doesn’t mean you can’t move the needle on your credit score.
Getting organized – making an honest budget is a good start – and exercising a lot of discipline with spending can help you improve your credit score dramatically in as little as two years.
Some of the steps you can take include:
- Check your score immediately after your bankruptcy is discharged to find out where you’re starting from and keep track of the progress as you go through the process.
- Review your credit report to make sure all bills are discharged and that creditors are not still showing you as delinquent on payments.
- Pay all bills on time. By far the BEST way to raise your score. That means credit cards, rents, utilities, cell phones – everything! – so you can prove that your habits have changed and you are creditworthy.
- Rent a house for two years and make on-time payments every month.
- Get a secured credit card and keep balances under 30% every month. If you can afford it, get an auto loan and make all payments on time.
- Start a savings account and make regular deposits to it.
- Investigate loan options. Talk to your local banks and credit unions and explain your story, especially if a medical illness or sudden job loss was the cause of your bankruptcy.
- Search online for loan opportunities for less-qualified buyers. Find out if you qualify for a FHA or VA loan. See if you qualify for any state or local government programs.
Beware of Predatory Lenders
As your credit score rises, you may get anxious about finding a loan to buy a new home. Be careful who you deal with because you are a prime target for predatory lenders.
Predatory lending is most often associated with payday loan and car title loan companies, but it also rears its ugly head with some mortgage lending companies. There is no strict definition of predatory mortgage lending, but if you have been denied credit a few times or only qualify for “sub-prime” loans, you are a candidate.
Here some practices that should serve as a warning:
- Excessively high interest rates. Your credit score already puts you in the high-risk category, but be sure you comparison shop interest rates before agreeing to a loan.
- Excessive fees and insurance. Again, you’re a high risk and the lender will try to use that as an excuse to charge you unreasonable amounts or make up fees and insurance he says you need to compensate for the low credit score.
- Lending without regard to ability to repay. If you never qualified for anything more than a $75,000 loan, be careful when they say you are suddenly qualified for a $150,000 loan.
- Constantly urging you to refinance. This is a very common practice. They start you with a high-interest loan, then call you six months later to say you’re qualified for lower rate if you refinance. The problem is, you have to pay all the fees and costs associated with refinancing and the lower interest rate does nothing to compensate.
If you suspect that you’re being taken advantage of, ask a third-party to review your loan and look for anything out of line.
If you already have been through bankruptcy, there is no sense going through another financial crisis.
(2015, January 24) FHA Loan Rules for FICO Scores and Applications Post-Bankruptcy. Retrieved from http://www.fhanewsblog.com/2015/01/fha-loan-rules-for-fico-scores-and-applications-post-bankruptcy/
Davila, D. (2016, February 29) What is the average credit score for new homebuyers? Retrieved from http://www.investopedia.com/ask/answers/022916/what-average-credit-score-new-homebuyers-elli.asp
Harney, K. (2016, June 22) You don’t need a stellar credit score to qualify for a mortgage. Retrieved from https://www.washingtonpost.com/realestate/you-dont-need-a-stellar-credit-score-to-qualify-for-a-mortgage/2016/06/21/125d0f92-3702-11e6-8f7c-d4c723a2becb_story.html
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