When it comes to getting qualified for a mortgage loan, a bankruptcy can play a crucial role in your ability to get approved. There are several factors that a bankruptcy has on the loan process. Knowing what to expect can help you improve your chances for a loan approval.
The Waiting Period
If a person has filed bankruptcy, it will be more difficult to get approved for a home loan. Many home loan programs will require a waiting period from the time the bankruptcy has been discharged before the loan can be approved. Depending on what type of bankruptcy that you filed will depend on how long the waiting period will be. If you filed a chapter 7 bankruptcy, then you will have to wait at least two years from the discharge date before the loan can be approved. The two year waiting period is based on a FHA home loan. A conventional mortgage loan will require a four year waiting period.
If you have filed a chapter 13 bankruptcy, the waiting period is still the same on a conventional home loan, but on a FHA loan, there is a way to finance a house while still in chapter 13 bankruptcy. FHA home loan programs will consider the filing date when calculating the waiting period. A chapter 13 bankruptcy customer can get approved for a mortgage loan after one year from filing the bankruptcy. Since many customers are still in chapter 13 bankruptcy after one year, you must get approval from the trustee of your case, that you can add a new debt like a mortgage. Without the trustee approval, you will not get approved for the home loan.
All home loan approvals with customers still in chapter 13 bankruptcy require manual underwriting and must follow the FHA mortgage guidelines.
Reestablishing Credit
For most clients that file bankruptcy, the hardest step in getting a mortgage approved is that many loan companies require that the customer has reestablished a good credit history since the bankruptcy. The reestablish credit history must also show no new derogatory accounts since the bankruptcy. For example, if you have a bankruptcy that was discharged in 2007 and in 2008, your car was repossessed, then you will not qualify for a loan.
Reestablishing new credit history usually consists of at least an auto loan and a revolving credit account. Make sure to keep your revolving account balance below 10% of the actual credit limit. Home loans require the reestablishment of credit for qualification.
There are other mortgage loan programs besides FHA loans and conventional home loans that have different guidelines when considering a bankruptcy. These types of mortgages are considered non-traditional mortgage loans and many of these programs require a large down payment. Home loan rates on these programs are also usually 2 to 3 percent higher than a normal conventional mortgage.
Avoid New Negative Credit
The most important thing to remember after a bankruptcy is to reestablish credit and do not have any new negative accounts since the bankruptcy was filed. You want to show the lender that the bankruptcy was an once in a lifetime event and will not happen again. If the lender believes that there is a habit of bad credit or the likelihood of filing bankruptcy again, the home loan will be declined.
Bankruptcy is not a loan killer, but if you have filed bankruptcy in the last seven years, it is important to make sure that you are doing everything possible to have positive credit, especially if you want to buy and finance a new property.
