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How Soon After a Bankruptcy Can I Get a Mortgage?

July 2nd, 2013 · 3 Comments · Bankruptcy, Mortgages

by Kristy Welsh

(Last Updated On: July 1, 2013)

House Foreclosure Q. I filed Chapter 7 bankruptcy about two and a half years ago due to some medical issues topped off with a job loss. We reaffirmed our current mortgage in the bankruptcy, so we still have our  pre-bankruptcy home. I am working again and my wife and I are expecting a new baby and need a bigger place. The real estate market in our area is much better than it used to be and we could sell our current home without taking a loss. Is it possible to buy a house this soon after declaring bankruptcy?

A. First of all, congratulations on both the new job and the new baby!

In determining whether or not you could qualify for a new mortgage, we need to review the types of loans available. There are generally four types of mortgage loan products: conventional, FHA, VA and B-paper (also known as non-conforming conventional loans). Of the 4 products, only conventional, FHA and VA loans offer the low interest rates along with low down payment requirements.

Underwriting guidelines for loans are determined by the secondary market in which they will be sold after the loan closes. In general, banks do not service their loans. Servicing a loan consists of collecting the interest on the loans month by month as the means of making a profit. Banks want to lend out their money as often as possible, so they free up their funds by selling them on a secondary loan market for a set profit.

Conventional Loans

Conventional loans are sold to either the Fannie Mae or Freddie Mac secondary market. Both Fannie and Freddie guidelines require a 4 year wait period after a bankruptcy before a a borrower can qualify for a loan.

Conventional loans require 5% down, and also require private mortgage insurance (PMI) on loan amounts over 80% of the value of the home. However, you can circumvent mortgage insurance on purchase conventional loans by getting a first mortgage for 80%, a second mortgage for 15%, and putting 5% down (making a total of 100%). Second mortgages can be difficult for those who have a bankruptcy, as lending guidelines for second mortgages tend to be tighter than first mortgages.

FHA and VA loans

FHA and VA loans are sold on a government secondary market called Ginnie Mae. The underwriting guidelines for both FHA and VA loans require a 2 year waiting period from the discharge of bankruptcy. FHA and VA guidelines both mention the possibility of extenuating circumstances, in which financial trials happened beyond a borrower’s control and are not likely to repeat. In an approved extenuating circumstances case, 12 months is all a borrow has to wait. However, a bank can impose stricter standards over and above Ginnie Mae guidelines should they choose, and not many banks are willing to lend 12 months after a Chapter 7 bankruptcy. A small phone survey of local mortgage professionals in the Phoenix area found no lender willing to lend before the 2 year period is up on either FHA or VA loans, extenuating circumstances or not.

FHA loans only require a 3.5% down payment and also allow a seller to contribute up to 3% of the closing costs, making this a attractive option for those with not much upfront cash. However, FHA loans require mortgage insurance in the form of a monthly fee tacked onto the principal and interest payment. This can be quite expensive, possibly adding a hundred dollars or more to the monthly bill. VA loans require no PMI.

B Paper (Non-Conforming Conventional) Loans

Non-conforming loan programs exist for those not qualifying for a conventional or government-insured loan. However, the terms are far less attractive than their conforming counterparts. Depending on credit, down payments can run as high as 10-30% percent of the value of the home. Interest rates run 2%-4% above conventional/FHA/VA mortgages’ interest rates, meaning significantly higher mortgage payments.

In all Cases, Reestablished Credit is Critical

In all cases of bankruptcy, whether the loan you want to qualify is government, conventional or non-conventional, a demonstration of re-establishing credit must be shown. This means that a borrower must apply for new credit post-bankruptcy and show a perfect payment history on all new credit lines. This itself can be a barrier to entry, as getting new credit such as auto loans and credit cards can be expensive or even impossible as long as a bankruptcy appears on your credit report. Secured credit cards are recommended to reestablish new credit.

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3 Comments so far ↓

  • Ricardo Negron

    Question – I filed for Chapter 13 banckruptcy bur the banckruptcy was never finished it was dimissed with prejudice, it shows in my credit report that i declared and filed,. am i able to dispute this information with the credit bureas and have it removed. i have aleter from the court saying it was never ratified and dismissed with prejudice please advise

    thanks

  • Kristy Welsh

    You can always dispute the information on your credit report. I’d start with a reason as “not mine”. Bankruptcies are tough to remove, just warning you, but it’s your legal right to dispute anything on your credit report. Because you filed a BK at all, it will appear on your credit report. Sending in that paper will do nothing to remove it.

  • Deleimy Castillo

    I took years to bring up my score to 790 to 801. I purchased an use car and the dealer brought down my my credit score 160 point. My credit score now is 630. I am very upset. My dream of becoming a home owner is gone in the next year is gone. I feel helpless. I cannot afford a lawyer. Is there anything that I can do.

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