Bankruptcy: Guidelines for Qualifying for Your Next Mortgage Loan
When someone files for bankruptcy it’s typically due to some sort of catastrophic event or several events that occurred beyond the individual’s control. For example, a loss of a job or unemployment can cause someone to get into financial trouble. An extended illness is a contributor and so too is a death in the family. Divorce can cause financial complications. These external events are one qualifier lenders refer to when evaluating a loan application after someone has filed for a bankruptcy. If someone is simply too careless over time with finances and piles up credit balances to the point that person can no longer make all the minimum monthly payments on time, lenders frown on this behavior.
It’s relatively easy for someone to prove that a bankruptcy filing was beyond the individual’s control. If there was an extended illness that kept someone from working, copies of medical bills can provide third party evidence. So too can a simple credit report showing multiple medical collection accounts concentrated around a specific period of time. If someone is unemployed, that can be verified as beyond the individual’s control by showing unemployment compensation or contacting the previous employer. When a couple splits and get divorced, matching up who is responsible for a specific credit account can be a problem. Perhaps they applied for several joint credit accounts and one of the individuals taking responsibility for a particular credit account defaults, it can hit the other person’s credit report. This too is easily documented. But it can’t be stressed enough that external events caused the bankruptcy filing, not careless handling of finances.
The next important thing lenders require is having re-established credit after the bankruptcy. This means the individual needs to open up new credit accounts, charge something and make timely payments, at least not any payments made more than 30 days past the due date. Even just one such payment listed can cause a mortgage company to turn down a new loan application with a bankruptcy in the past. But some might wonder how someone can open up new credit accounts with a fresh bankruptcy showing up. That’s a fair question and the answer is there are credit accounts designed specifically for those who need to reestablish credit. The interest rates are much higher compared to someone with good credit but that’s to offset the risk of issuing a new credit account with a recent bankruptcy.
There are also secured credit cards that can be taken out. A secured credit card is one where the individual places a deposit with the credit card company. The amount of the deposit will vary but many times it is the same amount of the initial line of credit but it doesn’t always have to be the same. Over time with a timely payment history this deposit can be returned to the customer. Automobile loans are also available for those with damaged credit. In fact, most any type of secured credit can be available in many instances. The creditor has some sort of collateral available in case the account goes into default.
Two Types of Bankruptcy
There are two types of bankruptcy that individuals can file. A chapter 7 filing is a complete discharge of all eligible debt. Wiped away completely. Some debt cannot be completely discharged however. Income taxes, support payments and alimony cannot be discharged. The other bankruptcy option for an individual is called a chapter 13 filing. A chapter 13 does not discharge debt but instead is a repayment plan for outstanding debt. A person makes an application for a chapter 13 and the courts then contact the creditors for a payoff amount. Then, the individual’s income is reviewed and a new repayment plan is prepared. Creditors must approve of the plan but this is rarely an issue. The other option would be a complete discharge so the creditor with a chapter 13 will at least recover some of what is owed. To qualify for a chapter 13, there are some income limitations. Someone for example who makes too much money might not be approved for a 7 as the court believes the individual has the funds needed to repay the creditors.
In addition to the two types of filings, different loan programs can have different waiting periods before being able to get approved for a home loan. FHA loans ask for a two year waiting period with a chapter 7 discharge. With a chapter 13, you’ll need at least one year of seasoning as well as show the monthly payments to creditors have been paid as agreed. VA loans also ask for a waiting period of at least two years before being eligible for a VA loan. Conventional loans, those underwritten to Fannie Mae and Freddie Mac guidelines need a four year waiting period after a chapter 7 and two years after a chapter 13 has been successfully repaid. Once these waiting periods have passed and credit reestablished, standard qualifying guidelines apply.