People who have filed for bankruptcy or have been the subject of property foreclosures get a negative effect on their credit ratings. While this negative effect is not as critical a hit as in the 90’s, it can still hamper a person’s ability to buy a new home. Lenders are understandably wary of potential borrowers who have demonstrated poor financial management. However, while it can be difficult, there are ways for you to be able to purchase a new home after bankruptcy or foreclosure. It does involve a bit of seasoning or wait time and meeting certain lender requirements.
After Chapter 7 Bankruptcy
Lenders look at those who have filed for Chapter 7 bankruptcy less favorably compared to those who filed for Chapter 13. Most conventional lenders require around four years’ seasoning before they consider those who filed for Chapter 7. The seasoning usually begins right after the action is discharged.
However, if the same person is a veteran or a returning serviceman, he can opt for a VA home loan if he qualifies. Another option is through the FHA loans. The wait time for both is just two years.
After Chapter 13 Bankruptcy
As said above, conventional lenders are more lenient to those who filed for Chapter 13 bankruptcy compared to those who filed for Chapter 7. There have been cases where people who filed for bankruptcy were able to get a mortgage while still in an active Chapter 13. Per FHA.com, lenders are allowed to consider FHA loan applications from borrowers who filed for Chapter 13. However, that is only for cases where plan payments have been made and verified for at least a year. Aside from that, the debtor must secure a written approval from the court-appointed trustee and submit a detailed explanation of the bankruptcy with the loan application. With these—and if the debtor has adequate credit, a good employment history and other financial qualifications to back up his application—he or she may qualify for mortgage.
After Foreclosure
People who lost their home due to foreclosure face a longer wait time that could be as long as seven years from the foreclosure date. However, there are instances where people were given home loans three years removed from foreclosures as long as they could prove that the foreclosure was caused by circumstances beyond their control. Those who availed of a short sale or deed in lieu to avoid foreclosure are looking at around four years. The wait time for an FHA loan, however, is just around 3 years from the foreclosure date. VA loans usually have a two year wait time, but veterans and servicemen who short sold their property may not have to endure any wait time anymore as long as they qualify.
After Bankruptcy and Foreclosure
Things get more complicated when the situation is a mix of bankruptcy and foreclosure. Conventional lenders may have different requirements; some may be more lenient while others may be stricter. The general rule is that seasoning starts when you are no longer responsible for the mortgage debt, whether that is through debt discharge through bankruptcy or through foreclosure. You will not have to endure the waiting period for both.
But getting the loan approved is another matter. Bankruptcy and foreclosures will seriously hurt your credit rating so the tip here is to spend the seasoning period building up your credit score.
Bankruptcy isn’t the end, contrary to popular belief. Instead, it offers a period in which to get back on your feet and reestablish yourself as a new person in the eyes of the economy. Once you’ve stabilized