Bankruptcy Law

Applying for a Mortgage After Bankruptcy

One of the biggest worries that filers have when proceeding with a bankruptcy case is how the matter will affect their ability to obtain financing in the future, including a mortgage for a new home. While a bankruptcy case does impact a person’s credit score, all hope is not lost for eventually being able to purchase a home and obtain a mortgage. It depends a great deal on the success of the bankruptcy case and the consumer’s financial habits after the case is closed.

A Chapter 7 liquidation bankruptcy case is a much faster bankruptcy route that takes several months to finalize, while a Chapter 13 reorganization bankruptcy case can take between three to five years to finalize. A Chapter 7 bankruptcy case can stay on a person’s credit report for up to ten years from the date of filing, while a Chapter 13 bankruptcy case can stay on a person’s credit report for seven years from the date of filing or ten years if the bankruptcy is not completed or discharged.

However, that bankruptcy case on a person’s credit report merely shows that he or she had financial struggles at one point in his or her life. The more time that passes from the date of filing, the less of an effect the bankruptcy case will have on the person’s credit report. Additionally, if the person exercises good financial habits after the bankruptcy case is over, this fact will also reflect on his or her credit report.

It is recommended that a bankruptcy filer wait a certain length of time before moving forward with purchasing a home. Even after a certain amount of time has passed, the interest rate on the mortgage may be significantly more than it would be for someone who did not go through a bankruptcy case.

How long that waiting period should be depends on the type of bankruptcy case and the type of loan being sought. For someone seeking an FHA or VA mortgage, the waiting period for a Chapter 7 bankruptcy filer is two years from the date of filing. It is three years if the Chapter 7 bankruptcy client is seeking a USDA mortgage and four years for a conventional mortgage.

For someone who has just completed a Chapter 13 bankruptcy, these waiting periods are shorter. For borrowers seeking FHA, VA or USDA mortgages, the bankruptcy filer only needs to wait one year from the date the bankruptcy was filed. For a borrower seeking a conventional mortgage, the waiting period is two years from discharge or four years from the date the case was dismissed.  The reason why the waiting period is shorter for a discharge than a dismissal is it shows that the filer was working hard and was successful in completing the repayment process. Given how long it takes to complete a Chapter 13 case, the waiting periods are much shorter than for a Chapter 7 matter.

Borrowers will need a credit score of at least 620 to successfully obtain a conventional mortgage with a down payment of at least 20 percent. FHA loans require a somewhat lower score around 580 with a down payment of around 3.5 or 500 with 10 percent down. Borrowers can obtain a USDA loan with no money down and no minimum credit requirement.

If someone is interested in applying for a mortgage after completing a bankruptcy case, certain steps can help him or her be approved for financial assistance, including the following:

  1. The borrower should monitor his or her credit report annually through one of the three major credit reporting agencies. If any errors are identified in the report, they should be reported and corrected;
  2. Be cautious of how much debt is taken on after the bankruptcy case is closed. Also, avoid closing any accounts as this can also reflect negatively on a person’s credit report;
  3. Save as much as possible before applying for financing so that the down payment made on the home can be more substantial. The larger the down payment, the lower the interest rate on the mortgage will be;
  4. Gather all necessary paperwork from the bankruptcy case, including the discharge and schedule documents, recent paystubs, two years of tax returns and any other paperwork that the lender and underwriters will want to review before approving financing; and
  5. Before signing on the dotted line for any mortgage paperwork, be sure to shop around for the best loan and best interest rate.

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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.

 

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