Debt Settlement Versus Bankruptcy Mortgage Guidelines

Debt Settlement Versus Bankruptcy Mortgage Guidelines

This BLOG On Debt Settlement Versus Bankruptcy Mortgage Guidelines Was UPDATED On December 31st, 2018

Bankruptcy is a federal law where it gives consumers a chance to financial start. Bankruptcies will either discharge consumer debts or give consumers a chance to buy time in reorganizing their debts and have a new financial start.

There are several types of bankruptcies.

However, the two most common consumer bankruptcies are the following:

  • The first type of bankruptcy is Chapter 7 bankruptcy which is total liquidation and complete discharge of the filers debts where the bankruptcy:
    • The petitioner gets zeroes out all of their debts and gets a fresh financial start
    • A Chapter 7 Bankruptcy discharge will completely discharge all debts of a consumer
  • The second type of bankruptcy is Chapter 13 bankruptcy which is debt reorganization
    • The debts of the petitioner of a Chapter 13 Bankruptcy is restructured
    • A repayment plan is structured with the petitioners income
    • A percentage of the petitioners income is allocated every month to pay the creditors in a certain amount of time which is normally 60 months
    • After the petitioner pays all creditors on time for the 60 month term, the remaining balance owed is discharged by the Bankruptcy Courts

Home Buyers can qualify for home loans after bankruptcy. A home buyer can qualify while in an active Chapter 13 Bankruptcy repayment plan after 12 months into the Chapter 13 on VA and FHA Loans. There is no waiting period after Chapter 13 Bankruptcy on VA and FHA Home Loans.

Home Loan After Bankruptcy

For those who file bankruptcy, there are mandatory waiting periods in order for them to be able to qualify for a residential mortgage loans.

  • There is a mandatory 2 year waiting period from the discharge date of a Chapter 7 bankruptcy to qualify for FHA Loans
  • There is a two year waiting period to qualify for a VA Home Loan after Chapter 7 Bankruptcy discharged date
  • There is a three year waiting period to qualify for a USDA Loan after Chapter 7 Bankruptcy discharged date
  • There is a four year waiting period to qualify for a Conventional Loans after a Chapter 7
    • Waiting period is two years after Chapter 13 discharged date
    • Waiting period is four years after Chapter 13 dismissal date
  • Home buyers who are in an active Chapter 13 Bankruptcy repayment plan can qualify for a FHA or VA Loan one year into the Chapter 13 Bankruptcy Repayment with Trustee Approval
  • There is no waiting period after a Chapter 13 Bankruptcy discharge on FHA and VA Loans
  • There is no waiting period after bankruptcy and/or foreclosure with non-qm loans

Should I File Bankruptcy Or Should I Wait It Out?

Many folks victimized by this country’s economic and real estate meltdown have tried very hard not to file bankruptcy. Many felt that debt settlement versus bankruptcy was better. These folks decided to enter into a debt management and debt settlement program. Debt Settlement companies contact creditors and negotiate on a payment plan or a reduction of their debts on behalf of their clients. Whatever a debt settlement company can do, a consumer can do it themselves.

  • This is a real honorable way of satisfying debt obligation
  • Majority of consumers consider this tactic as being financially responsible, however, there are mortgage lenders do not feel this way

Debt Settlement Versus Bankruptcy: What Is Better For Mortgage?

Consumers who were in a debt settlement program at one time or another in the past and are about to apply for a residential mortgage loan, they may face hurdles. This often happens when lender will consider debt settlement same as a Chapter 13 Bankruptcy.

  • Most lenders consider debt settlement as another form of bankruptcy
  • Many lenders frown on those who have entered into such program
  • Other lenders consider debt settlement worse than bankruptcy
  • This is because with a bankruptcy, federal laws protect consumers and once debts are discharged, creditors cannot come back to collect
  • To be frank, most lenders prefer bankruptcy than debt settlement
  • That does not seem like common sense
  • But due to Barney Frank and Chris Dodd, the Dodd-Frank Mortgage Act, many new laws and regulations do not make sense
  • That is what we get having two politicians with no banking and mortgage experience create our banking and credit laws

Qualifying For Mortgage With Debt Settlement Versus Bankruptcy

Debt Settlement does not require any waiting period for FHA, VA, or Conventional Loans. Lenders requiring waiting period after debt settlement is due to their own overlay and not federal mortgage guidelines. Folks who have had entered into a prior debt settlement program do not have to worry about meeting any waiting period requirements with a lender who has no lender overlays.

  • I strongly recommend consulting with a mortgage lender with no lender overlays
  • A bank may deny borrowers with prior debt settlement
  • There mortgage bankers that will not accept any borrowers with a prior debt settlement
  • However, many lenders with no overlays specializing in bad credit mortgage loans will definitely be able to help
  • I had a recent client who had excellent credit scores but had a prior bump several years ago where he lost his job that had to go through a debt settlement program
  • My client got rejected by half a dozen lenders due to his prior debt settlement
  • We overlooked his prior debt settlement program and approve the mortgage loan

Home Loan After Debt Settlement

Home Buyers who had a prior debt settlement and are having a difficult time in getting a mortgage lender to approve your mortgage loan, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Here is the website of Gustan Cho Associates . We are available 7 days a week, evenings, weekends, and holidays.

Related> Debt Settlement And How Lenders View It

Related> Is Debt Settlement Worse Than Bankruptcy?

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