According to the American Bankruptcy Institute, 1.5million people filed for some form of bankruptcy in 2010. This is a 9% increase in filings since 2009. Even before 2009, the amount of filings for bankruptcy increased by double-digit percentages. There are many reasons the rates have gone up so much – high unemployment rates, the foreclosure crisis, economic recession, etc. But, if you are trying to be approved for a mortgage after filing, you are not alone. As a result of high numbers of bankruptcy filings, lenders are more willing to consider extenuating circumstances today than they were in the past.
It is possible to be approved for a mortgage loan after filing for bankruptcy. But, it depends on the type you are filing for; Chapter 7, or Chapter 13, and other factors. You may have to wait 1-4 years before you can get another mortgage approval.
Some prospective buyers will struggle to rebound from this. For others, purchasing a home may be more feasible, but may not be the most financially savvy next step. However, there are things you can do *now* to improve your chances of being approved later on. Some ways to do this are: repaying your debt, saving money, and rebuilding your credit.
But, the question still remains. Can you buy a home after bankruptcy? The short answer is: yes, yes you can buy a home after bankruptcy.
BUYING AFTER BANKRUPTCY
The most common forms of bankruptcy are Chapter 7 and Chapter 13. The chapter you experience, will pay a roll in how soon you can be eligible for a mortgage. Different mortgage companies have different “seasoning periods” following a bankruptcy or foreclosure. Lenders can and probably will, have their own in-house requirements on top of that.
The difference between the two is how the debts are handled:
With Chapter 7, the consumer is asking the courts to wipe the slate clean, that they want their debt/obligations to be discharged by the court.
With Chapter 13, the consumer makes an effort to pay back some or all of the debt/obligations. The courts approve a payment plan, and then they start paying back.
In general, buying a home after filing a Chapter 13 is easier than filing Chapter 7. This is because the consumer is taking responsible steps forward and repaying the debt. The result: They may not have to wait as long before qualifying for another mortgage.
BUYING AFTER FORECLOSURE
People who have lost their homes due to being foreclosed on, can face a longer wait than filing for bankruptcy. Short Sales, and deeds-in-lieu of foreclosure (or foreclosure alternatives), and even adjustments can also trigger seasoning periods.
Borrowers who can show that the foreclosure happened directly because of circumstances out of their control may be able to qualify after 3 years. But you would have to make a 10% down payment. Following a short sale or a deed-in-lieu, it is usually a 4 year wait unless there were justifying circumstances.
You can typically be approved for an FHA loan once you are 3 years out from a foreclosure or short sale. VA Lenders can approve financing at the 2-year mark following a foreclosure. Depending on who your lender is, veterans and service members may not have to wait at all after a short sale!
While government backed loans provide more elasticity regarding foreclosure, there is a rumple worth noting. If your foreclosure occurred on one of these loans (FHA, VA, or USDA), you might face an automatic 3 year wait before being eligible for another. A lot of this will depend on whether or not the default winds up reported to a database that tracks default on federal debt.
BANKRUPTCY AND FORECLOSURE
Things can get very dark when the two are in the mix together. It is very common for homeowners to file bankruptcy, and then see their home foreclosed a couple years, or even months, down the road. At this point, we are talking about 2 potentially different seasoning periods.
It is generally a matter of when you are no longer legally responsible for the mortgage debt. If it is absolutely and truly discharged in the bankruptcy, lenders can essentially disregard the soon coming foreclosure or short sale. You are not going to be hit twice with seasoning periods. Whether you can still qualify from a credit standpoint is another story. Both bankruptcy and foreclosure can take a serious toll on your credit scores.
Consumers will have to spend much of those mandatory waiting periods re-establishing their financial situation. During the re-building phase, consumers can track their progress by pulling credit reports and scores often.
2015 FHA GUIDELINES
Bankruptcy: You may apply for a FHA loan after your bankruptcy has been discharged for 2 years with a Chapter 7. You may apply for a FHA loan after your bankruptcy has been discharged for 1 year with a Chapter 13.
Foreclosure: You may apply for a FHA insured loan three (3) years after the sale/deed transfer date.
Short Sale / Deed-in-Lieu: You may apply for a FHA loan 3 years after the sale date of your foreclosure. FHA treats a short sale the same as a foreclosure now.
Credit must be re-established with a 640 minimum credit score.
2015 VA GUIDELINES
Bankruptcy, Chapter 7: You must apply for a VA guaranteed loan 2 years after Chapter 7
Bankruptcy, Chapter 13: If you have finished making all the payments, the lender may conclude that you have re-established satisfactory credit
- If you have made the at least 12 months of satisfactory payments, and the Trustee or the Bankruptcy Judge approves of the new credit, the lender may give a favorable decision.
- Foreclosure: You may apply for a VA guaranteed loan 2 years after a foreclosure
- Short Sale / Deed-in-Lieu: You may apply for a VA guaranteed loan 2 years after a short sale, unless it was a VA loan – then restrictions apply.
- Credit must be re-established, with a minimum credit score of 620
2015 USDA GUIDELINES
Bankruptcy: You may apply for a USDA rural loan 3 years after the discharge of a Chapter 7 or 13.
Foreclosure: You may apply for a USDA rural loan 3 years after foreclosure
Short Sale / Deed-in-Lieu: If you had big issues, the deed in lieu of foreclosure will be viewed as a foreclosure and you would want to wait no less than 3 years if your credit score is under 640. Over 640 and your UW will make the call, but typically not less than one year.
Mortgage debt included in bankruptcy will go by Bankruptcy discharge date, and subsequent foreclosure, shore sale, or deed-in-lieu of foreclosure will not count as an additional waiting period, as long as you are off title for any defaulted mortgages.
Date of credit approval must be after the above waiting period to be eligible for USDA financing after hardship.
2015 CONVENTIONAL (FANNIE MAE) GUIDELINES
Bankruptcy: You may apply for a Conventional, Fannie Mae loan after your Chapter 7 bankruptcy has been discharged for 4 years. For a Chapter 13 it is 2 years.
Foreclosure: You may apply for a conventional, Fannie Mae loan 7 years after the sale date of your foreclosure. Additional Requirements may apply
Short Sale / Deed-in-Lieu:
Effective 7/29/2014: Waiting period for subsequent foreclosures that was included in Bankruptcy was waved. If the mortgage is included in the Bankruptcy suit, the waiting period defaults to 4 years from the discharge date.
Effective 8/16/2014: Shore Sale, or Deed-in-Lieu of Foreclosure not included in a bankruptcy has a new waiting period of 4 years from the date your name is removed from the title. This replaces the ability to buy in 24 months with a 20% down payment and a minimum credit score of 680.
7 years about 90% loan value with less than 10% down payment – subject to private mortgage insurance underwriting guidelines.
Credit must be re-established with a minimum credit score of 620
Fannie Mae has reduced waiting period in cases of severe circumstances – the death of a primary bread winner seems to be the only one that I have been able to identify up until this point.
Until next time friends…
Nicole D., Tobacks Resident Blogger