Many people considering bankruptcy are concerned about their options for purchasing a home after bankruptcy. In many ways, qualifying for a loan after bankruptcy is no different from qualifying for a mortgage without a history of bankruptcy. That is, the lender’s determination will be based on the same set of factors, such as the amount of the loan in comparison to your disposable income and your credit history.
Of course, bankruptcy is a negative entry on your credit report. However, bankruptcy is just one type of credit reporting black mark. Chances are good that if you are considering bankruptcy, you already have some negative entries on your credit report. And, if your financial circumstances are not resolved, it is likely that you will continue to post late payments, high balances, collection accounts, and other negatives.
On the other hand, data suggests that many people see a significant increase in credit scores shortly after bankruptcy. In fact, one study revealed that mean credit scores after Chapter 7 bankruptcy were more than 80 points higher than the mean prior to filing. The mean Chapter 13 score increased by 75 points.
Your ability to secure a mortgage, and to secure a mortgage on favorable terms, after bankruptcy will depend in large part on how you manage your credit and other finances after bankruptcy, and that boost in credit score is one step in the right direction. Melissa Wetzel, Managing Attorney for Bond, Botes & Wetzel, P.C., has been assisting consumers seeking bankruptcy protection in Mobile, Alabama and the surrounding area for over twenty years and notes that it is much easier for her clients to rebuild credit following bankruptcy now than it has ever been.
How Long Will Bankruptcy Impact Mortgage Eligibility?
People concerned about the impact of bankruptcy and credit often ask how long a bankruptcy filing will remain on their credit reports. The answer to that question is that a Chapter 7 bankruptcy may remain on your credit report for up to 10 years after filing, and a Chapter 13 bankruptcy may remain on your credit report for up to 7 years. However, that is not really the most important question to consider when weighing the impact of bankruptcy on mortgage eligibility. That’s because a bankruptcy carries less weight and is of lesser concern to potential creditors as time passes.
In fact, certain types of mortgage loans specifically provide for eligibility after bankruptcy, and the waiting is typically nowhere near the amount of time that the bankruptcy will remain on your credit report. For example, Federal Housing Administration (FHA) loans have a 2 year waiting period from the date of a Chapter 7 discharge. In some situations, it may be possible to qualify for an FHA mortgage while a Chapter 13 bankruptcy case is still underway, but only if payments have been made on schedule for at least one year. The limitations are the same for Department of Veterans Affairs (VA) loans.
Requirements for conventional loans are a bit more stringent, since those lenders are not protected by government insurance. However, conventional lenders will typically consider applicants for mortgage loans four years after a Chapter 7 discharge or two years after a Chapter 13 discharge.
Securing a Mortgage Loan after Bankruptcy
Of course, simply reaching the end of the prescribed waiting period does not mean that you will qualify for a mortgage loan. Being outside the waiting period is a threshold issue–a minimum requirement for these types of lenders to consider making a mortgage loan. Eligibility and terms will ultimately be determined in the same way they would for any other borrower: by considering your payment history, your credit score, your other outstanding debt, the amount of the loan, the value of the property, the amount of your down payment, and the income you have available to make mortgage loan payments.
In some circumstances, a borrower may even be able to qualify before the standard waiting period has expired. For example, mortgage loan giant Fannie Mae provides for exceptions to the waiting period in the event of extenuating circumstances. Extenuating circumstances are defined as events beyond the borrowers’ control that result in sudden, significant, and prolonged reduction in income, or a catastrophic increase in financial obligations. Some examples may include a serious medical crisis, job loss followed by a significant period of unemployment, or divorce. Similarly, some lenders may waive or shorten the waiting period if you are able to offer a large down payment.
However, it is not always in your best interest to take advantage of the quickest opportunity to obtain a mortgage loan. It is important to consider other factors, such as interest rates and your own certainty that your financial situation has stabilized sufficiently to ensure that you will be able to make timely mortgage payments on an on-going basis.
Home prices are on the rise in the Birmingham-Hoover Metro area: the median price of homes currently listed for sale is $240,000, and Zillow predicts an additional 4.6% increase in home values over the coming year. When the principal balance on a loan runs to hundreds of thousands of dollars, seemingly small differences in terms–particularly in interest rates–can cost the buyer tens of thousands of dollars, so it is never wise to jump at the first loan you qualify for.
Mortgage after Bankruptcy in a Nutshell
The bottom line is that for most people, the desire to buy a home in the future should not act as an obstacle to bankruptcy. Whether you choose to file bankruptcy or to resolve your financial difficulties through other means, you will be required to rebuild your credit over time in order to qualify for a mortgage and receive favorable terms. For some people, the bankruptcy process provides a jump start to improving credit scores, and allows the rebuilding process to begin sooner. If you need help with your bankruptcy or mortgage process, get in touch today for a free consultation.
Brad Botes is a principal of each of the Bond & Botes Law Offices throughout Alabama, Mississippi, and Tennessee. He holds a Bachelor of Science from the University of North Alabama, and a Juris Doctorate from Cumberland School of Law at Samford University. He and his team of bankruptcy lawyers have spent over 30 years guiding people through financial challenges. Read his full bio here.