Conventional Loan After Chapter 7 Bankruptcy Mortgage Guidelines

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This BLOG On Conventional Loan After Chapter 7 Bankruptcy Mortgage Guidelines Was UPDATED And PUBLISHED On November 19th, 2019

Conventional Loan After Chapter 7 Bankruptcy
Gustan Cho Associates

To qualify for a conventional loan after Chapter 7 bankruptcy, there is a minimum mandatory waiting period of 4 years after the discharge date of the bankruptcy.

  • Why is there a four waiting period after bankruptcy?  
  • In order to get an approve/eligible per DU FINDINGS and/or LP FINDINGS after four years of a bankruptcy discharge, the mortgage applicant needs to be a strong borrower
  • Borrowers who have the following
    • Re-established credit
    • No late payments after Chapter 7 bankruptcy
    • Higher down payment on a home purchase
    • Reserves
    • Other compensating factors after bankruptcy discharge

In this article, we will cover and discuss qualifying for a conventional loan after Chapter 7 Bankruptcy.

General Guidelines On Conventional Loans

With the above, Fannie Mae’s and/or Freddie Mac’s Automated Underwriting System will most likely approve borrowers for a conventional loan after Chapter 7 bankruptcy with a four-year waiting period.

  • However, if borrowers have the following:
    • Lower credit scores
    • Little to no reserves
    • Late payments after bankruptcy
    • No compensating factors

If borrowers have the above, then the chances are that borrower will not get an approve/eligible per DU or LP FINDINGS

  • It is extremely important that mortgage borrowers re-establish credit
  • Make sure not to have any late payments after bankruptcy discharged date

Basics Of Conventional Loans

Basics Of Conventional Loans

There are times where a home buyer needs to go with a conventional loan program than an FHA insured mortgage loan.

  • FHA has much lenient mortgage lending guidelines than conventional loan programs
  • For example, the waiting period to qualify for an FHA Loan After Chapter 7 bankruptcy is two years from the bankruptcy discharge date
  • Whereas to qualify for a conventional loan after Chapter 7 Bankruptcy, the waiting period is 4 years
  • The waiting period can be longer with lenders that have overlays on conventional loans
  • Lenders with no overlays will go off finding on the AUS
  • To qualify for a conventional loan after Chapter 7 bankruptcy is determined by the Automated Underwriting System
  • The Automated Underwriting System will determine how strong a conventional mortgage applicant is
  • The Automated Underwriting System will analyze the borrower
    • AUS will see if he or she has re-established credit
    • Whether they have any late payments after the bankruptcy discharge
    • Credit debt to income ratios
    • Overall credit history
    • Income, reserves
    • Other credit and asset factors

Qualifying For FHA Loans Versus Conventional Loans

Qualifying For FHA Loans Versus Conventional Loans

To qualify for a 3.5% down payment purchase FHA insured mortgage loan, the mortgage applicant needs a 580 FICO score.

  • To qualify for a 5% down payment home purchase conventional loan, the mortgage loan applicant needs a minimum of a 620 FICO credit score
  • If a home buyer is set on purchasing a condominium that is not FHA approved, then the home buyer needs to go through the conventional mortgage loan route 
  • Also, there are now new 2018 FHA mortgage lending limits that is now in effect
  • In most counties throughout the country, FHA now set the maximum loan limits in 2018 at $294,515 unless the property is located in a high cost county area
  • The old FHA maximum loan limit was at $275,665 but HUD Increased The FHA Loan Limits Beginning January 2018
  • Conventional loan limits is at $453,100 unless the property is located in a high-cost county area where it is greater than the $453,100
  • For those homebuyers who need a mortgage loan greater $294,515 and up to $453,100, then the home buyer needs to go through the conventional mortgage loan route

In most cases, you can go up to a 50% debt to income ratio on conventional loans.

Second Homes, Vacation Homes, Investment Homes

Second Homes, Vacation Homes, Investment Homes

Home Buyers of second homes, vacation homes, or investment homes, conventional loans are the only way to go. All conventional loans have a four-year waiting period after Chapter 7 Bankruptcy.  With Chapter 13 Bankruptcy, there is a two year waiting period after Chapter 13 Bankruptcy discharged date to qualify for conventional loans. There is a four year waiting period after the Chapter 13 Bankruptcy dismissal date to qualify for conforming loans.

  • FHA insured mortgage loans are only for owner-occupied primary residential homes
  • Home Buyers or second homes or investment properties need to go with conventional loans
  • To qualify for a vacation or second home, a minimum of a 10% down payment is required
  • For investment homes, a minimum of 15% down payment is required
  • 25% down payment is required if the potential rental income needs to be used to qualify for the mortgage loan applicant’s debt to income ratios
  • 75% of the market rent will be used as income for those investment home buyers who need to use the potential rental income in order to qualify for the investment home mortgage loan

What If I Have Mortgage Part Of Chapter 7 Bankruptcy?

What If I Have Mortgage Part Of Chapter 7 Bankruptcy?

Consumers who had mortgage part of Chapter 7 Bankruptcy, there is a four-year waiting period to qualify for conventional loans after Chapter 7 Bankruptcy discharged date. However, the housing event needs to be finalized as follows:

  • Short Sale
  • Foreclosure
  • Deed In Lieu Of Foreclosure

So if a conventional loan borrower has a mortgage part of Chapter 7 Bankruptcy four years ago but the foreclosure was not finalized until a month ago, the borrower will qualify for a conventional loan even though the housing was not finalized until recently:

  • The date of the foreclosure, deed in lieu of foreclosure, or short sale does not matter as long as mortgage was part of the bankruptcy
  • This is not the case with government loans
  • With FHA, VA, USDA Loans, the waiting period clock starts from the date of the short sale and/or recorded date of the foreclosure/deed in lieu of foreclosure

Home Buyers who need to qualify for conventional loans or government loans with a direct lender with no lender overlays and licensed in multiple states, please contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

Gustan Cho

www.gustancho.com

1 Comment
  1. Adele McCoy says

    Just wanted to call out Alex Carlucci of Gustan Cho Associates for his fantastic service through my home buying process – from identifying the best rate through to obtaining approval and settlement. This was my first home purchase and I think it’s fair to say that it would have been significantly more challenging without his help. Alex Carlucci of Gustan Cho Associates was on top of everything that needed to be done – going the extra bit in dealing with the bank and conveyance to ensure that the whole process was concluded smoothly. The best part was that Paul was always there to answer any questions and provide support, making life much simpler. Highly recommended!

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