This guide covers debt settlement versus bankruptcy mortgage guidelines. 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. Homebuyers can qualify for a mortgage after bankruptcy.

The team at Gustan Cho Associates has helped countless clients boost credit scores to over 700 FICO in less than one year after the bankruptcy discharged date. Bankruptcy is a great tool to restart one’s financial credit profile.

Gustan Cho Associates also has non-QM mortgages one day out of bankruptcy with a 30% down payment.  All outstanding debts such as collections, charged-off accounts, liens, judgments, and other derogatory debts get discharged with a bankruptcy discharge. In this article, we will discuss and cover Debt Settlement Versus bankruptcy mortgage guidelines.

What Is Debt Settlement

Debt settlement is when a consumer negotiates the terms and repayment of their debt. Due to being behind on their debts due to job loss or other extenuating circumstances which caused a major reduction in their household income where they can no longer afford the terms of the original payment plan, many consumers opt for debt settlement versus bankruptcy. Debt settlement can be risky because not only can it devastate one’s credit scores but sometimes it will deepen the debtor’s debt. There are thousands of debt settlement companies who are reputable and do the very best for their clients. But as with many industries, there are scammers also who prey on those who are in financial trouble. Be aware of debt settlement companies who ask for large deposits upfront and check on their references before hiring them. In this article, we will cover and discuss qualifying for a mortgage after debt settlement versus bankruptcy.

Choosing Between Debt Settlement Versus Bankruptcy

Many hard-working folks who can benefit from a bankruptcy discharge are so stubborn and set in their ways that they will do debt settlement versus declaring bankruptcy. Unfortunately, many lenders treat debt settlement the same as bankruptcy. Other lenders treat debt settlement worse than bankruptcy. Creditors realize that once someone files bankruptcy, they cannot file another bankruptcy for the next seven years. However, with debt settlement, creditors think of them as open timebombs because they can file bankruptcy at any time. It is best recommended that you utilize bankruptcy versus debt settlement. In this article, we will discuss and cover qualifying for a mortgage after debt settlement versus bankruptcy.

Types of Bankruptcy: Chapter 7 Bankruptcy

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 filer’s 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.  Waiting Period: 2-4 years after discharge, depending on the lender and loan program (FHA, VA, Conventional). A good payment history on all accounts after discharge is required. Larger down payments, typically 10-30%, may be necessary on non-QM loans.

Chapter 13 Bankruptcy 

The second type of bankruptcy is Chapter 13 bankruptcy which is a 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 Chapter 13 on VA and FHA Loans. There is no waiting period after Chapter 13 Bankruptcy on VA and FHA Home Loans. Waiting Period: 12-24 months after completing the repayment plan and obtaining a discharge, or four years from the dismissal date if not completed. Credit Re-establishment: Timely payments on all accounts during the repayment plan are essential. Down Payment: Smaller down payments may be allowed if the repayment plan is completed. Click here to Qualify for mortgage Loans in chapter 7 and chapter 13 bankruptcy

Getting Approved For a Mortgage After Debt Settlement

When obtaining a mortgage after debt settlement or bankruptcy, lenders have specific guidelines and waiting periods for borrowers to be aware of. In the following paragraphs, we will cover a comparison of the typical mortgage guidelines for debt settlement and bankruptcy.

Debt Settlement Guidelines

Waiting Period: Most lenders require 24-48 months after the last settled debt before considering a mortgage application. Some may accept as little as 12 months. Borrowers are expected to re-establish good credit by making timely payments on all accounts after the debt settlement. A larger down payment, usually 20-25%, may be required to offset the credit risk. Borrowers may need substantial cash reserves, often equal to several months of mortgage payments. Lenders will require a letter of explanation detailing the circumstances that led to the debt settlement and documentation of the settled accounts.

General Considerations

Extenuating Circumstances: Lenders may be more lenient if the debt settlement or bankruptcy was due to extenuating circumstances like job loss, medical issues, or divorce. Credit Scores: Higher credit scores can improve mortgage qualification chances after re-establishing credit.

Debt-to-Income Ratio: Lenders will closely evaluate the borrower’s debt-to-income ratio to ensure they can comfortably afford the mortgage payments.

It’s important to note that mortgage guidelines can vary among lenders, and some may have more or less strict overlays than the general guidelines outlined above. Working on rebuilding credit and providing strong documentation of financial recovery can improve the prospects of obtaining a mortgage after debt settlement or bankruptcy.

Home Loan After Bankruptcy

For those who file for bankruptcy, there are mandatory waiting periods in order for them to be able to qualify for 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 the Chapter 7 Bankruptcy discharged date. There is a three-year waiting period to qualify for a USDA loan after the Chapter 7 Bankruptcy discharged date.

Mortgage Waiting Period Guidelines After Bankruptcy

There is a four-year waiting period to qualify for Conventional Loans after a Chapter 7 Bankruptcy discharged date: The waiting period is two years after Chapter 13 discharged date. The waiting period is four years after the Chapter 13 dismissal date.

Homebuyers who are in an active Chapter 13 Bankruptcy repayment plan can qualify for an 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 obligations. The majority of consumers consider this tactic as being financially responsible. However, there are mortgage lenders who do not feel this way. Click here to apply for mortgage Loans after bankruptcy

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 may face hurdles. This often happens when the lender will consider debt settlement the 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 a program. Other lenders consider debt settlement worse than bankruptcy.

This is because with bankruptcy, federal laws protect consumers and once debts are discharged, creditors cannot come back to collect.bTo be frank, most lenders prefer bankruptcy to 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 creates 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 a 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 a prior debt settlement.

There are 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

Homebuyers who had a prior debt settlement and are having a difficult time getting a mortgage lender to approve your mortgage loan, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Here is the website of Gustan Cho Associates. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. Talk to us about Qualify for home loan after debt settlement

How Do Debt Settlement Companies Work

A reputable debt settlement company may establish an escrow account for consumers. The company will recommend paying them a portion of a paycheck. They may hold it in escrow so the creditor finally agrees on a dollar amount. The escrow account will have enough of a lump sum to offer them as a settlement. I strongly advise anyone against giving anyone a portion of their paycheck every month. Tell the debt settlement company that consumers will be saving portions of a paycheck and save the money themselves on a separate account to get ready for a lump settlement. There are no guarantees that debt will be settled. Statistics prove that over 75% of debts are never settled so the odds are against consumers. Remember that consumers can settle own debt instead of hiring a debt settlement company.

Be Cautious Of Debt Structuring Companies

Debt restructuring companies are not allowed and it is against the law to charge up front fees for services not performed. The Federal Trade Commission has forbidden the charging of upfront fees to debt relief companies back in 2010. Most debt restructuring companies will charge consumers a percentage of the debt they save. Normally they will charge you 20% of the debt they save. If they charge consumers more than 50% of the debt they save, they are charging too much. Some debt assistance companies try to find a loophole in charging consumers upfront fees by calling the upfront fee as a processing fee, which is not illegal but is actually an upfront fee. Debt settlement companies will probably charge a monthly fee to be part of their debt restructuring program as well.

Taxed On Forgiven Debt

Another thing consumers need to consider is that forgiven debt and/or write-offs can be classified as income and may be liable to pay income tax on the debt forgiveness. Consumers need to consult a tax advisor or accountant. With the combination of paying a debt settlement company and the potential of paying taxes on the forgiven debt. Consumers may want to think twice on hiring a debt assistance service. Whatever a debt restructuring company service can do, the consumer can do it themselves. There are many free  Do It Yourself debt assistance informational materials available.

Many Mortgage Lenders Consider Debt Settlement Worse Than Bankruptcy

There are many mortgage lenders that really frown upon mortgage borrowers who had prior debt restructuring done. They sometimes view settlement on debts as worse than bankruptcy. This is because, with bankruptcy, they cannot refile bankruptcy for another 7 years. Whereas settlement of debts, they can easily file bankruptcy anytime. Many disagree with folks with their mentality on their views of debt restructuring and settlement. There are lenders who just regard debt settlement as a period of financial hardship.

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