You filed for bankruptcy and assume your chances of securing a mortgage are lost. It used to be that you had to wait 7 years to start again. Luckily, this is not the case today. With an FHA mortgage, you only have to wait 2 years, sometimes less. It depends on the type of bankruptcy you chose. We discuss your different options below.
Why the Waiting Period
You might wonder why you have to wait after filing bankruptcy. If you improved your credit, shouldn’t you be able to apply for a loan? You could, but lenders want to be cautious. You have a history of defaulting on your loans in a big way. Bankruptcy is as bad as it gets, outside of foreclosure. You wrote off your debts. Any new lenders want to make sure you put things back in order before lending you new money. This takes time.
You can’t just assume you straightened things out after a few months or even a year. You need a proven track record. This is why you must wait a year or two before you can apply again. It takes that long for your credit score to improve. Actually, it takes that long for creditors to trust you again. You can’t just run out and get new credit after your bankruptcy is discharged. It takes time and effort. During this time, you can learn to become more financially responsible. This is the reason for the waiting period.
Chapter 7 Bankruptcy Rules
If you filed for Chapter 7 bankruptcy, you must wait 2 years for an FHA loan. This 2 year mark starts on the date your bankruptcy is discharged. This is different from the date you filed. It is the date your case goes to court and the judge approves the discharge of your debts. This is when the clock starts ticking.
During the 2 years, you have a job to do. You have to establish your credit again. This means applying for secured credit cards or department store cards. It also means using those cards – charging them and paying them off right away. You must show financial responsibility. Any late payments you make during this time will harm your score even more than before. Lenders will look at any late payments as reason not to give you a new loan.
Keep in mind, among those 2 years, you should establish some type of housing history. More than likely, this means renting. The history of these payments is important. Any new lender will likely ask for proof of timely payments. You can prove this with a formal Verification of Rent filled out by your landlord. You can also provide canceled checks over the last 12 months showing the rent and the date you paid it.
Chapter 13 Bankruptcy Rules
Chapter 13 bankruptcy rules work a little differently. This bankruptcy is not a discharge of your debts. Instead, it is a restructuring of them. This means you still pay them. Most people make the payments to the trustee of the case. The trustee then sends the payments to the appropriate parties.
In order to qualify for a mortgage after a Chapter 13 bankruptcy, you need the approval of the trustee. He must agree that you can afford the mortgage. You can only do this after 12 months of paying your debt payments. You must also prove timely payments of these debts. If you had any late payments during this time, no lender will approve you for an FHA loan.
Start Preparing Early
Feeling exhausted after filing for bankruptcy is normal. But, you must pick up the pieces. The clock starts ticking right after your BK is discharged or right after you make 12 payments. During the waiting period, make the most of what you have. Start establishing credit. Make your payments on time and save money.
You need not only a solid financial history, but enough savings to help you secure the loan. FHA loans need 3.5% of the purchase price down on the home. There are also closing costs to pay. While you could use a co-signor or receive gift money, it helps to have some of your own money saved. This shows the lender you did bounce back and can take on new debt.
Stay on Top of Your Credit
Your credit score will play one of the most important roles in the process. This is the longest part of the process too. Credit scores don’t bounce back very easily. It takes time and plenty of effort. You shouldn’t pay anyone to repair your credit, though. You can do it on your own.
Watch your credit score as much as you can. Take a close look at the history. If you find anything inaccurate, report it right away. Supply the proof that will help you turn it around. If you find negative credit reporting that is accurate, figure out a way to fix it. The quicker you act, the quicker your credit score will turn around.
FHA Loans are Lenient
FHA loans are among the most lenient in the industry, especially after a bankruptcy. They don’t have extenuating circumstances programs available any longer. But, they only require a 2-year wait. Of course, this doesn’t mean automatic approval after 2 years. You must show that you deserve it.
Try to raise your credit score to at least 580, if not higher. You should also focus on keeping your debts down. FHA debt ratios are 31/43. If you can keep your ratios even lower than that, you have a better chance of approval. Remember, lenders want to see compensating factors. They need something to make up for the fact that you have a recent bankruptcy. Once you can do that, you should be eligible for an FHA loan.
Every lender accepts different things, though. If one lender turns you down because of your bankruptcy, don’t assume you are out of luck. Keep shopping with different lenders. The FHA sets the minimum rules, but lenders can add overlays. Find a lender with the least amount of overlays. This will help you enjoy home ownership after taking care of your bankruptcy problems.