This guide covers how bankruptcy affects mortgage approval and the waiting period after discharge date. Bankruptcy is a great tool for people to utilize if they are drowning in debt and want a fresh financial start in life. Two of the most common types of consumer bankruptcy is Chapter 7 and Chapter 13 bankruptcy.
Mortgage rates on non-QM loans depends on the loan-to-value and the borrower’s credit scores as well as layered risk factors. The higher the risk, the higher the mortgage rates on non-QM loans.
In the following paragraphs, we will cover how bankruptcy affects mortgage approval. We will also discuss the mandatory waiting period requirements after bankruptcy on government-backed and conventional loans. There are non-QM loans one day out of bankruptcy or foreclosure with no waiting period requirements. Non-QM loans require a larger down payment but does not require mortgage insurance.
Why File Bankruptcy?
Millions of Americans have fallen victims to this country’s Great Recession where they have lost their homes or lost a substantial reduction in income which affected their overall household income.
Many have gone through extended periods of unemployment where they have fallen so far behind on their monthly credit obligations where they had no ways of catching up and were constantly hounded by bill collectors.
Others have gotten civil judgments from credit card companies and other creditors where they were threatened with wage garnishments and bank account garnishments. For these hard-working people, filing Chapter 7 bankruptcy was their only option. Bankruptcy can have a significant impact on mortgage approval. In the following paragraphs, we will cover the significant impact bankruptcy affects a mortgage approval for a homebuyer.
How Bankruptcy Affects Mortgage Approval: Rebuilding Credit After Bankruptcy
The longevity on how long the discharge date of a bankruptcy has been seasoned is a major factor lenders consider when approving a mortgage. A bankruptcy will lower credit scores however, many people have gotten their credit scores to 700 plus in less than one year after a bankruptcy discharge. A lower credit score can make it more difficult to qualify for a mortgage or result in higher interest rates. However, re-establishing and rebuilding your credit can boost your credit scores in a short period of time. Following bankruptcy, it’s crucial to rebuild your credit. This can involve making timely payments on any remaining debts, using secured credit cards responsibly, and keeping credit utilization low. Lenders will want evidence of responsible financial behavior before approving a mortgage. Click here to qualify for a mortgage after bankruptcy
Waiting Period After Bankruptcy on Government and Conventional Loans
After filing for bankruptcy, there is typically a waiting period before you can qualify for a mortgage. Type of bankruptcy filed (Chapter 7 or Chapter 13) and the type of mortgage you seek (FHA, VA, conventional, etc.).
Type of Bankruptcy
Chapter 7 bankruptcy involves liquidating assets to pay off debts. In contrast, Chapter 13 involves creating a repayment plan to repay debts over time. Lenders may view Chapter 13 more favorably because it shows an effort to repay debts. In contrast, Chapter 7 might be considered a more significant risk. Even if you qualify for a mortgage after bankruptcy, you may have a stronger credit history. Lenders may view you as a higher-risk borrower, so they may mitigate this risk by charging higher rates and fees.
Down Payment Requirements
Lenders may require a larger down payment from individuals with a bankruptcy on their credit history. This is another way for lenders to mitigate the risk of lending to someone with a history of financial difficulties. However, you’ll likely face stricter requirements, higher costs, and a longer wait before being eligible for a mortgage than someone with a clean credit history, of mortgage approval after bankruptcy. Consulting with a mortgage professional can provide personalized advice based on your situation.
Reasons Why Bankruptcy is Necessary
Many creditors are willing to work with consumers during hardship and will offer a re-payment plan and understand that people can go through tough times during tough economic times where they have lost their jobs or had other economic events such as divorce, loss of business, or medical issues.
There are creditors who do not care and will do anything possible to collect their money via direct collection efforts or by hiring a third-party collection agency.
Larger collection agencies can be ruthless and will do anything and use any means to collect their debt and show no mercy. They will go for the jugular and file suit where they can obtain a civil judgment. Many will even go to the extent to garnish the debtor’s wages and bank accounts. When this situation arises, many consumers have no other choice but to file bankruptcy.
Avoiding Bankruptcy Because How Bankruptcy Affects Mortgage Approval
If a consumer has understanding creditors where they are willing to offer debt settlement or a reasonable re-payment plan, they can possibly avoid filing for bankruptcy and see if they can work things out.
Many creditors are willing to work with consumers including mortgage companies, automobile finance companies, medical collectors, credit card companies, and other creditors
However, one ruthless creditor can force consumers to file for bankruptcy because they may garnish their wages. If a creditor or creditors are adamant in suing to get a judgment, consumers might be forced to file bankruptcy unless they can enter into a reasonable re-payment plan.
Judgments and How Bankruptcy Affects Mortgage Approval
How Bankruptcy Affects Mortgage Approval: Judgments are the main reason most consumers are forced to file for bankruptcy. A judgment is probably the worst derogatory item you can have on the credit report. A judgment will scare most lenders and creditors in granting new credit
A judgment is issued by a judge and it is a court’s decision that the debt of a creditor is valid. Gives the right for a creditor to collect the judgment and place appropriate liens on their assets which includes your property.
Borrowers who have assets, a judgment can pose a problem where it will enable the creditor in enforcement the civil judgment by placing liens on your assets. Borrowers who have multiple judgments, bankruptcy might be the only solution to get the judgments cleared. Click here to know about bankruptcy affects mortgage approval
How Bankruptcy Affects Mortgage Approval: Home Loan With Judgment
Lenders frown on civil judgments and most mortgage lenders will require you to have the judgment paid off before they will grant you a mortgage loan approval. However, I have approved borrowers who had outstanding civil judgments
The only way I can offer a mortgage approval for folks who have civil judgments is only if the borrower can have a payment plan with the judgment creditor:
Consumer needs to have paid them for at least three months. Borrowers need to provide proof of the payment agreement. Provide three months of canceled checks proving borrower has made at least three payments. As long as the borrower can provide me with that, I can get the borrower a mortgage loan.
Getting Qualified For a Loan How Bankruptcy Affects Mortgage Approval
Can I get qualified for a home loan and pre-approved after a bankruptcy? Absolutely. Bankruptcy is a great tool for someone to get a fresh start in life. Once you get your bankruptcy discharged, you have zero debt. You should start re-establishing your credit right away by getting three $500 limit or more credit limit credit cards.
You can have credit scores higher than 700 FICO after a year of filing bankruptcy if you get your credit re-established by getting three to five secured credit cards.
Homebuyers will be able to get a mortgage loan exactly two years after the discharge date of your bankruptcy. We also have a new program where homebuyers can qualify for home loans with no waiting period after bankruptcy or foreclosure. NON-QM Loans are portfolio loans where it does require 20% down payment but have no waiting period after bankruptcy or foreclosure. Contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Visit our website at www.gustancho.com .
This BLOG on how bankruptcy affects mortgage approval was UPDATED on March 24th, 2024.
