Most folks think that if they file for bankruptcy, they’ll never be able to get credit again. They have dreams of buying a house, so they wait and wait while interest accumulates on their accounts. They struggle to repay the money they owe until eventually, they have no choice but to file for bankruptcy. With their dreams of purchasing a home supposedly dashed, they plod on with their lives, doing the best they can.
None of this has to happen. You can (and will) qualify for a mortgage if you play your (credit) cards right. Remember, once you’ve filed for bankruptcy, there is a period during which you cannot file again. Some credit card companies will take a chance on you, albeit with higher interest rates and terms that heavily favor their interests. But credit is available and the time to start rebuilding it is immediately after your bankruptcy discharge.
Waiting Period for Mortgage Applications
There is no mandatory waiting period immediately after filing bankruptcy to apply for a mortgage. For an FHA mortgage, you will need to wait at least one year after bankruptcy to apply for the loan so long as all other criteria are met.
In either case, you will need to ensure that you continue making payments on your credit cards and that your debt-to-income ratio is high enough to apply for the loan. The lender will likely make you wait at least one year before agreeing to a mortgage loan even if your lender isn’t FHA certified.
Traditional mortgage lenders typically require higher credit scores to get a loan but offer better rates to those who qualify. Each lender will have its own set of guidelines when approving applicants for a mortgage. Those who have shown good credit habits over the course of one to four years will have the best chance of qualifying for a traditional mortgage.
FHA Mortgages and Chapter 7 Bankruptcy
FHA has two separate guidelines for those who filed under Chapter 7 and those who filed under Chapter 13. Those who filed under Chapter 7 will need to wait at least two years before applying for an FHA mortgage, while those who filed under Chapter 13 will only have to wait one year.
Logistically, since FHA loans require other qualifications, you may have to wait longer than the one- or two-year minimum. However, during this time period, you can begin rebuilding your credit to ensure that you do meet the minimum requirements. These include:
● Being able to make a down payment of 3.5%
● Being able to afford the mortgage payment and any outstanding debt
● Having an established credit history
● Having a FICO score between 580 and 640
You will also need to ensure that your loan does not exceed FHA limits.
If you’ve filed for a Chapter 13 bankruptcy, you won’t have to wait at all. You don’t even have to wait until your bankruptcy is complete before applying (and being accepted) for a loan. You will need to ensure that your debt-to-income ratio is high enough and that your credit score is above 580 if you want to apply for an FHA loan. However, even if you’re approved by the FHA and your lender, the bankruptcy court can prevent you from incurring more debt while in bankruptcy. This is to ensure that your creditors are repaid and that you’re not overextending yourself financially. For that reason, most folks who have an open Chapter 13 bankruptcy do not elect to apply for a mortgage. But it still goes to show you that it is possible.
FHA’s Back to Work / Extenuating Circumstances Program
Most folks who file after Chapter 7 will need to wait two years before applying for an FHA mortgage. These loans are insured by the government and are meant to encourage investment in the home market. Those who filed under Chapter 7 may need to only wait one year after their bankruptcy discharge provided that certain conditions are met. These include:
● The borrower experienced an “economic event” that was beyond their own control and resulted in a 20% overall reduction in their income for a minimum of 6 months
● Negative credit ratings resulted from the economic event
● The borrower has made an economic recovery
● The borrower has completed housing counseling
If all of these conditions are met, the borrower may be able to apply for an FHA loan after one year of filing for bankruptcy. Economic events that would qualify for such a waiver include:
● A sudden illness that prevented you from working
● A work- or car-related accident that reduced your income
● You were laid off by your employer and forced to take a lower-paying job
So long as you can show that you fully recovered from the economic event that destroyed your credit and reduced your income, you can still qualify for an FHA mortgage one year after a Chapter 7 discharge.
Establishing Credit After Bankruptcy
Ideally, after you’ve filed for Chapter 7 bankruptcy, there is one thing that you have going for you. Your debt-to-income ratio heavily favors your income. In the case of a Chapter 13, this may not necessarily be the case. Your outstanding debts will need to be repaid during the bankruptcy and the amount you repay is directly related to your income. In some cases, it may be more difficult to qualify for a loan during a Chapter 13 bankruptcy than it would under Chapter 7.
That being said, potential creditors are more suspicious of those who filed under Chapter 7 than those who filed under Chapter 13. This is because those in Chapter 13 are actually repaying some of their debt.
However, not all bankruptcies are alike and not all bankruptcies are treated alike. The bottom line is that those who commit to improving their credit, make timely payments on outstanding debt, and work hard to rebuild their finances will not be stifled by a bankruptcy for very long.
Talk to a Eugene, Oregon Bankruptcy Attorney Today
If you’re in financial trouble and worried about how it could impact your future, talk to Tom at Butcher Law Office, LLC today. We can determine if bankruptcy is right for you, talk about your future goals, and set you on the path to financial freedom.