Bankruptcy is an unfortunate fact in millions of American’s lives today thanks to the housing and economic crash everyone experienced a few years back. What was once a devastating event that set you back for at least 10 years is now a common sight in many households and one that you can work around rather easily. You can obtain a mortgage even with a bankruptcy in your past much easier today than ever before. You just need to know the particulars of each program to know how long you have to wait and what you have to do in order to prove yourself worthy again.
VA loans are very forgiving when it comes to bankruptcies. Typically you must wait two years after your Chapter 7 bankruptcy discharge to apply for a VA loan. The discharge means the date the bankruptcy ended, not the date you filed for it. This is the date that all debts were wiped clean and you started over. After two years, it is the VA’s hope that you turned your financial life around and are ready to take on a mortgage again. Of course, you should have built your credit back up by this point, meaning that you have a few new trade lines that you paid on time and have not maxed out.
The VA is also generous with Chapter 13 bankruptcies, which are debt repayment plans. They want to see a payment history of on-time payments for at least 12 months with your trustee. In addition, they want approval from the trustee to add another debt to your financial load right now as the trustee knows and understands your finances better than anyone else at the moment.
FHA loans, another government-backed loan, have similar rules as the VA. This means that even if you are not a veteran, you can have the good fortune of getting a mortgage only 2 short years after your Chapter 7 bankruptcy is over. You must go through the entire process of filing and discharging your bankruptcy in court, however, before the 2-year ticker begins. Once the 2 years are over, if you do not have any trade lines established yet, you will need to get one or two going. There are many ways to start your credit after a BK as many lenders are much more lenient today. If you are having trouble, try applying for a secured credit card or personal loan with collateral. Because you have a bankruptcy in your past, most lenders will want collateral to ensure they get paid if you default. Because the government backs FHA loans, banks are a little more lenient about providing a loan after a BK.
The rules for an FHA loan after a Chapter 13 bankruptcy are the same as the VA loan rules. You must be current on your payments and have a 12-month history. The lender will need to communicate with your trustee as well to ensure that you are in the financial position to add another debt to your monthly arrangements.
Conventional loans make you wait the longest after a bankruptcy if you want a mortgage. Typically a person with a Chapter 7 bankruptcy is eligible for a conventional mortgage four years after the discharge of the BK. Conventional loans do not only require the longer waiting period, but they have high requirements for credit scores and debt ratios. You cannot be borderline or over the limit and think you will get an exception, especially with a bankruptcy in your history. Because of this long waiting period and its strict guidelines, many people end up going with a government backed loan.
The wait after a Chapter 13 bankruptcy is also longer for conventional loans, but not quite as long as a Chapter 7 BK. Typically, 2 years must pass from the discharge of the BK before you can apply for a conventional mortgage. If there was no discharge, you have to wait 4 years, just like a Chapter 7 BK.
USDA loans are another government provided a loan that requires 2 years from the date of discharge before you can apply for a loan. The difference with this type of loan is that the less income you make, the more likely you are to get the loan. The USDA loans were created to help build up areas that were less fortunate than other areas and the homes that the banks provide this type of mortgage for are in rural areas or those areas that are less developed.
Because you have options after a bankruptcy, it pays to shop around and see what programs you may get approved for as there are many. Each program has its own benefits and drawbacks, so make sure to ask questions about each one. For example, FHA loans have mortgage insurance regardless of your loan-to-value ratio and VA loans have a funding fee. Each loan also has its own costs and requirements – talk to your lender to see what you may qualify for and then weigh the pros and cons of each before jumping in headfirst after a bankruptcy.