Qualifying For Home Mortgage After Bankruptcy

Advice In Qualifying For Home Mortgage After Bankruptcy:

There are two types of personal bankruptcies:  Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.  Chapter 7 Bankruptcy is often called total liquidation and is geared toward those folks who have little to no assets and have many unsecured debts, collection accounts, wage garnishments, and judgments.  Chapter 7 Bankruptcy allows a person get a totally fresh start in life where all of their debts are forgiven.  However, not all creditors and/or debts can be discharged in a Chapter 7 Bankruptcy.  Debts such as student loans, government loans, income taxes, child support, and judgments that involve fraud cannot be discharged in a Chapter 7 bankruptcy.  Chapter 13 Bankruptcy is a bankruptcy program where folks with assets and income need to restructure their debts over a period of time.  To file Chapter 13 bankruptcy, the petitioner needs to be either be employed or have his or her own business.  A percentage of the Chapter 13 Bankruptcy petitioner’s income is allocated towards paying back their creditors over a period of time and eventually the balance gets discharged.  On this article, we will concentrate with Chapter 7 bankruptcy and how filing bankruptcy affects a person chances of getting a residential mortgage loan.

Do I Need To File Bankruptcy?

Home buyers can qualify for a home mortgage after bankruptcy. If you are contemplating filing Chapter 7 Bankruptcy, there are many factors you should take into consideration.  Why are you filing bankruptcy?  Do you have maxed out credit cards?  How much do you owe?  Are you underemployed and taken a drastic cut in income and do not see the light at the end of the tunnel where you will not be able to pay your debts?  Are you majorly behind on all of your payments?  Do you have collection accounts?  Do you have collection agencies trying to garnish your wages and freeze your bank accounts?  Do you have multiple judgments against you? Many folks are afraid of filing bankruptcy because they think that bankruptcy is the end of the world and that they cannot qualify for home mortgage after bankruptcy. Home buyers can easily qualify for home mortgage after bankruptcy in as little as two years from the Chapter 7 Bankruptcy discharge date.

Home Mortgage After Bankruptcy: Collection Accounts

If you have older collection accounts that are dormant and collection agencies are leaving you alone and do not have any judgments against you, then maybe you might not need to file bankruptcy.  Most states have statute of limitations on collections which is 5 years, depending on the state.  Also, your derogatory collection accounts will fall off your credit report 7 years from the date of last activity.  Many folks believe that they cannot get a residential mortgage loan with open collections.  That is not correct.

Qualifying For Home Loan With Outstanding Collection Accounts

You can still qualify for a residential mortgage loan with open collection accounts and the collection balance does not need to be paid off.  However, if you have a balance of higher than $1,000 on your old collection account, 5% of the unpaid balance will be used in calculating your debt to income ratio.  This new mortgage lending guideline came into effect in early 2014.  The good news is th3 2014 mortgage lending guideline only applies to non-medical collection accounts with open balances and does not apply to medical collection accounts.  There are residential mortgage lenders that will require you to pay off open collection accounts and if this is the case, get another mortgage lender and/or mortgage broker that will be able to help you and do not have mortgage lender overlays and will just go off your automated findings per the Automated Underwriting System.

Debt Relief Through Bankruptcy

How much do you owe your creditors?  I have talked to hundreds of folks who want to file bankruptcy just because they owe just a few credit card companies and their debt is under $10,000.  If you are behind on your credit cards and owe less than $10,000, there are alternatives to bankruptcy.  Many credit card companies will eventually just write you off and report your credit card debt as a charge off and not pursue any more collection activities from you.  Again, with charge offs, you can still qualify for a residential mortgage loan and even with a collection account with a balance.  You can also negotiate your debt with the creditor or settle your debt with them for pennies on the dollar at a later date.  Depending on your financial situation, if you owe less than $10,000 to your creditors, maybe filing bankruptcy may not be your best option.  Depending on which bankruptcy attorney your hire, it may cost you anywhere between $2,000 to $5,000 or even more to file bankruptcy with an attorney.

Dormant Collection Accounts And Charge Off Accounts

What if I have a bunch of old collection accounts with balances and charge offs?  If you have aged collection accounts, do not pay them because once you make a payment, it will reactivate the date of last activity and will plummet your credit scores.  Most collection accounts that are older than 3 years become dormant and your best bet is probably to let the statute of limitations run out.  Depending on which state you reside, most states have a 5 year statute of limitations on credit card debt and charge offs from the date of last activity.  The credit bureaus needs to remove your derogatory information from your credit report in 7 years from the date of last activity.


What if I have judgments?  Judgments is a totally different issue.  A judgment is normally good for ten years in most states and is on your credit report for 7 years.  A judgment creditor can renew the judgment for another ten years.  If a judgment creditor finds out that you have assets and are making good money, a judgment creditor can enforce the judgment and attach liens to your assets, property, and can levy your bank accounts as well as garnish your wages.  Collection accounts can turn into judgments as well.  If you have multiple judgments and your judgment creditors are trying to enforce their judgment, a bankruptcy may be your only option.  You need to consult with a bankruptcy attorney to see if you have any alternatives to bankruptcy if you have multiple judgments against you and your judgment creditors are trying to enforce their court ordered judgments.

Cases Where Bankruptcy Cannot Help Me

If you only have student loans, tax liens, judgments for child support and alimony, or judgments where it involves fraud, a bankruptcy will not help you.  Any government loans, tax liens, government fines, government judgments, child support judgments, alimony judgments, judgments where it involves fraud, a Chapter 7 Bankruptcy will not help you.

Can I Get Home Mortgage After Bankruptcy?

The answer whether a home buyer can get a home mortgage after bankruptcy is ABSOLUTELY.  There is a 2 year waiting period after a bankruptcy discharge for you to qualify for a FHA insured mortgage loan with a 3.5% down payment.  You should start re-building your credit immediately after your bankruptcy discharge by getting a few secured credit cards.  A bankruptcy will plummet your credit scores by at least 150 points or more but by getting a few secured credit cards and re-establishing your credit, your credit scores will start soaring upwards every month.  I have seen folks have 700 plus FICO credit score after  one year of filing bankruptcy by just getting 5 secured credit cards and utilizing them and never being late on any monthly payments.  We will discuss more on re-establishing credit after a bankruptcy on later blogs. If you are interested in a home mortgage after bankruptcy, please contact Gustan Cho Associates at 262-716-8151 or email us at gcho@gustancho.com. We specialize in helping borrowers get home mortgage after bankruptcy with no lender overlays.

Gustan Cho


The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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