How to Qualify For A Mortgage After Bankruptcy?
A consumer’s dream of owning a home doesn’t have to end simply because of bankruptcy. Consumers with a recent bankruptcy are often eager to know when they can qualify for a mortgage again. When it comes to the mortgage after bankruptcy, a consumer’s chances for fast approval vary widely. Many factors impact how long a consumer must wait to own a home after bankruptcy. However, consumers are often surprised at how soon their finances recover from bankruptcy.
Inform yourself to speed up the process of getting a mortgage after bankruptcy. The more you know and the more resourceful you are, the faster you can qualify for a mortgage loan. What you need to concentrate on initially is learning about mortgage offers. You should look for mortgages that are meant for those recovering from bankruptcy.
Dealing with bankruptcy is not easy. You’ll need to be persistent and disciplined to overcome bankruptcy financially. Fortunately, you may find that you can buy a home soon to achieve the American dream of homeownership despite a recent bankruptcy.
Mortgage Loans After Bankruptcy
There are some essential things you need to know about a home loan or mortgage line of credit after bankruptcy. Getting financed for a property is possible. Yet it’s obviously a bit more complicated than applying for a mortgage with flawless credit. You’ll have to work a little harder to own a home after bankruptcy.
The two main types of bankruptcy that a consumer can file for are:
- chapter 7 and
- chapter 13 bankruptcy
Generally speaking, waiting periods are longer for those who file for chapter 7 bankruptcy than for those who file chapter 13 bankruptcy.
The typical waiting period for a conventional loan, after a chapter 7 bankruptcy, is four years. However, the waiting period could be only two years after the discharge date for a consumer who files for chapter 13 bankruptcy. For an FHA loan, the waiting period is usually two years for a chapter 7 bankruptcy and one year for a chapter 13 bankruptcy.
Mortgages That Might be Ideal After Bankruptcy
You should take the time to explore the mortgages available to you. Those who look for a mortgage after bankruptcy needs to consider all the options. Finding a mortgage is a little more challenging after bankruptcy. When purchasing a home with bad credit, consumers need to consider options other than conventional loans. Consumers with a recent bankruptcy may not qualify for conventional mortgage loans. However, they may more easily qualify for one of the following mortgage loan types.
FHA loans are loans that are insured by the Federal Housing Administration. Because these loans are backed by a government organization, lenders are more lenient regarding the borrowers they approve. You could possibly get approved for an FHA mortgage with a credit score as low as 500. However, you’ll need to go through a waiting period before you can qualify for an FHA loan. You’ll also need to pay at least 10 percent of the home’s value as a down payment if your credit score is lower than 580.
You can consider a USDA loan if you’re purchasing a property in a rural location. These loans are backed by the U.S. Department of Agriculture. The waiting period for USDA loans after bankruptcy is relatively short. In fact, those who file for chapter 13 bankruptcy could be approved for a USDA loan after only one year has passed.
Consumers usually need a credit score of at least 640 to qualify for these loans. The term for a USDA mortgage is usually 30 years. It’s also important to note that these are generally fixed-rate mortgages.
Veterans could potentially qualify for a mortgage after bankruptcy through VA loans. Veterans could qualify for this type of loan after only two years even if their bankruptcy included a foreclosure. However, a credit score of at least 620 is generally important for acquiring a VA loan. At the same time, there are some lenders out there who offer VA loans without any credit score requirements. Some lenders offer VA loans with no money down to qualifying applicants.
The Waiting Period
You’ll probably have to go through a waiting period. Most lenders require consumers to go through a waiting period before qualifying for a mortgage after bankruptcy. How long this waiting period is, depends on a variety of factors. Lenders require a waiting period so that consumers take time to stabilize their finances before borrowing again.
Factors that influence waiting period length include whether there was a previous foreclosure and what circumstances brought about a consumer’s financial problems leading to bankruptcy. Also, the type of bankruptcy that the consumer filed for influences the waiting period length.
Many consumers with recent bankruptcies went through a foreclosure on the property they previously owned. If this is the case, the waiting period will be extended. Foreclosures extend the waiting period of conventional and FHA loans. In fact, a foreclosure will significantly extend the waiting period for conventional loans. The waiting period might remain the same regardless of foreclosure for USDA and VA loans.
The Extenuating Circumstances
Some consumers experience bankruptcy as a result of events outside their control. For example, consumers can experience bankruptcy because they had an illness that prevented them from working.
Extenuating circumstances may be present that shows a consumer’s bankruptcy was not the result of mismanagement of finances. If this is the case, a mortgage after bankruptcy could come more quickly.
What to do During the Waiting Period
If you’re interested in a mortgage after bankruptcy, don’t let yourself grow frustrated by the waiting period. Take advantage of this time. The last thing you want to do is get in over your head financially again. That’s why it’s important to go through the waiting period.
Waiting periods give you the opportunity to reestablish financial strength. There are numerous things you need to do during this period. Simply going through the waiting period isn’t enough. You also have to reestablish your creditworthiness during this period. The following are four things you should do during the waiting period.
Building Your Credit
The number one thing to focus on for mortgage after bankruptcy is increasing your credit score. Consider that you’re starting from scratch regarding your credit. Consider what credit accounts you currently have. If you still have any credit card accounts, pay down the balances. Also, make sure your payments are all on time.
If you’ve recently declared bankruptcy, you may not have any loan or credit accounts still open. In this case, you probably should open a secured credit card account. These accounts are easy to qualify for. They also give you the chance to build up a reliable repayment history. This is the first step to improving your credit.
If you want to own a home, it’s a good idea to increase your income. The more money you’re making, the more attractive you are as a borrower. You need to be employed to even consider any type of loan. Perhaps you can increase your income by working more hours. Alternatively, you may be able to start a business on the side. Another possibility is that you could apply for a second job. Anything you can do to improve your income will make financial management easier.
If you want to take out a mortgage after bankruptcy, you’ll need to make a down payment. It’s unlikely that you’ll qualify for a mortgage without any money down. This is difficult even in normal circumstances. It’s especially difficult after having recently declared bankruptcy.
During the waiting period, you can start accumulating savings. You can eventually use your savings to pay your down payment.
Pre-qualifying for a Mortgage
Although you can’t take out a mortgage yet, you may be able to pre-qualify for a mortgage. Shop around during your waiting period. This will help you to find possible mortgage lenders who can help you. Lenders often let you pre-qualify for a mortgage loan without officially applying. Pre-qualifying makes it so that you know who to turn to when you find a property you’d like to buy.
Taking Out a Conventional Loan After Bankruptcy
Some consumers might want to wait to take out a conventional mortgage after bankruptcy. They may not be able to qualify for FHA, USDA, or VA loans. In this case, the waiting period is going to be a little longer. Conventional loans aren’t backed by any government organizations. This means that lenders are relying on the borrower’s credit score alone to mitigate risk.
A borrower with a bankruptcy and foreclosure on his or her record may have to wait as long as seven years to qualify for a conventional mortgage. However, lenders may cut down this waiting period according to extenuating circumstances. They also may cut down this waiting period in the case of a chapter 13 bankruptcy.
The best way to find an appropriate conventional loan is to shop around. There are many mortgage lenders out there. Approval requirements vary widely between lenders. Use the Internet to explore your options. Look specifically for lenders who help consumers with recent bankruptcies. A traditional lender might not be able to help you.
In addition to using the Internet, you can also find information on lenders from your financial advisor. Ask your bank, credit union, or accountant for recommendations.
Protecting yourself financially should be the number one priority. It’s understandable that you want to own a home. However, you don’t want to get in over your head again. If you’ve had a bankruptcy in your past, then you’ve experienced the stress of having financial problems.
Don’t let the same thing happen again. Try to avoid borrowing whenever possible. If you do take out a mortgage loan, keep your balances as low as possible on your credit cards and other loans. You don’t want to let your debt get out of control.
Compare your mortgage options carefully. After bankruptcy, you may feel eager for any type of approval. However, you shouldn’t jump on the first offer you get. Evaluate offers carefully. Be aware of the interest rate. As previously mentioned, you want to avoid getting in financial trouble again. This means you need to avoid loans that are excessively expensive.
If the only mortgage loan you qualify for has a very high interest rate, it’s best to wait. Be patient and don’t buy a home until you can qualify for a decent interest rate. Otherwise, you’ll be throwing away a lot of money on interest charges. You’ll also be putting yourself at risk of additional financial troubles down the road.
The Things You Need
You can qualify for a mortgage after bankruptcy. Yet there are some things you’re going to need to make this happen. You won’t qualify for a mortgage right away. You’ll need to focus on making a mortgage approval happen. It may not be easy. The following are four important things you’re going to need to eventually qualify for a mortgage.
Above, we discussed the various waiting period requirements for a mortgage after bankruptcy. These waiting period requirements indicate that you need patience. Unfortunately, damage to your credit history doesn’t go away quickly. It can take months or even years to get back on track financially.
At the outset, be aware of the importance of being patient. The more patient you are, the less frustrated you’ll feel. Get used to rent for a while if you’ve recently had your home foreclosed on. There is no way around it. Consider that it’s probably best to wait after bankruptcy to borrow a mortgage anyway. You need time to build your credit again.
You can’t re-establish credit without income. You also can’t pay for a home without income. Perhaps you had to declare bankruptcy because you lost your job. In this case, you need to reestablish a reliable income stream.
Consider your employment options. Not only do you need income to rebuild your finances, but you should also maximize your income. The more money you bring in, the faster you can rebuild your finances.
It takes time to save up enough for a down payment on a home. Build your income and put a little aside each month. This allows you to save a down payment fund.
When it comes to re-establishing credit, the organization is important. Being organized makes it easier to keep up with our payments. Avoiding missed payments over time will boost your credit score.
Set up reminders when you have a loan or credit card payments to make. Even better, have payments automatically withdrawn from your account. This way, you can be sure that you won’t forget the payments you have to make.
Sit down and create a strategy for rebuilding your credit. Learn as much as you can about what factors influence your credit rating. Then, use every resource at your disposal to maximize your credit score as quickly as possible.
Any information you can find about credit building and mortgage providers can help you. Do your research. Make sure you understand how credit and mortgage loans work. Fortunately, these days information is so easy to come by. Get budgeting tips and other helpful information on the web. Also, talk to financial advisors and follow the advice of experts on whether you should take out a mortgage. Don’t be afraid to ask questions and learn from your bankruptcy and the aftermath.
Now that you’ve acquired some knowledge about mortgage after bankruptcy, it’s time to get started. Go through the steps mentioned above and you’ll clean up your finances in no time. Use the resources available to you. There are resources for both cleaning up your credit and searching for mortgage offers. Make sure you’re taking full advantage of these resources.
You’ll probably find that you can’t qualify for any mortgage offers right away. However, there are many things you can do in the meantime. Take advantage of your waiting period to get yourself ready to own a home. Once you get approved for a mortgage, you’ll feel like you’ve overcome your bankruptcy. Keep working hard and persisting. Bankruptcy is not the end of the world. Your efforts will pay off in the long run. Stay focused on revitalizing your finances and you’ll soon join the ranks of the many proud homeowners out there!
Katherine Davis is a freelance writer specializing in the subjects of finance, banking, and investment. Based in New York City, Katherine’s experiences combating the Big Apple’s outrageous real estate costs and living expenses have provided her with some great budgeting insights on stretching a dollar. A graduate of Penn State University, Katherine advises millennials to be disciplined when it comes to their finances and to start investing as soon as possible.