With Rates In The 3s, Post-Bankruptcy Applicants Are Asking When They Can Buy Again

June 18, 2016 - 6 min read

Post-Bankruptcy Buyers Capitalize On Rates In The 3s

Many Americans whose credit ratings dropped during the housing downturn are recovering and ready to move on.

Those who filed for Chapter 7 or 13 bankruptcy protection may have tried unsuccessfully to buy again.

Now, they might have their chance.

New guidelines — and entire new programs — have emerged to help buyers with a bankruptcy in their past.

The Federal Housing Administration (FHA) Back To Work program allows buyers to qualify just one year after a bankruptcy or other economic event.

This and other programs are helping former homeowners capitalize on today’s mortgage rates in the 3s. These rates are so low that applicants are finding future house payments will be cheaper than rent.

Thanks to new post-bankruptcy rules, these buyers do not have to endure an extensive waiting period and miss out on ultra-low mortgage rates.

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Can You Get a Mortgage After Bankruptcy?

The short answer is “yes.”

How soon you can get a mortgage after your bankruptcy depends on a few factors.

  1. The type of bankruptcy filed
  2. The mortgage program
  3. The lender’s requirements

The good news is that you have control over two of these factors. Your choice of mortgage program and lender can speed your goal of owning again.

Extenuating Circumstances

Most programs have different rules depending on the cause of your bankruptcy.

Those who sought bankruptcy protection due to extenuating circumstances get shorter waiting periods, sometimes much shorter.

In general, extenuating circumstances are events that result in an unforeseeable, substantial, and lengthy reduction in income or an extreme increase in expenses.

Some examples are a loss of a job or hours due to company downsizing, prolonged strikes, death of a breadwinner, or medical bills not covered by insurance. Applicants must be able to document the cause.

So, what about divorce?

This is a common occurrence, and often a valid reason for bankruptcy, but lenders typically do not consider it an extenuating circumstance for qualification purposes.

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Buying A Home After Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as a liquidation bankruptcy. The court discharges your debts, and you get a do-over in your financial life.

But mortgage programs require a waiting period following this event.

Lenders start the clock on your discharge date. Chapter 7 is considered more serious than Chapter 13, and so many mortgage lenders require a longer waiting period.

But each lender has a number of waiting periods from which you can choose, via the many programs that they offer. From conventional loans to FHA to VA, each program sets its own guidelines, and lenders have flexibility to choose the loan the best suits your situation.

Conventional loans

Freddie Mac and Fannie Mae require a four-year waiting period following the Chapter 7 discharge date.

But that rule is not hard-and-fast.

If your bankruptcy involved extenuating circumstances, that wait period drops to two years.

For multiple bankruptcy filings within the prior seven years, the waiting period is extended to five years.

FHA loans

FHA home loans are among the most lenient of programs when it comes to buying again after bankruptcy.

This loan allows you to finance a home purchase following a two-year waiting period. This guideline applies if you have reestablished good credit or chosen not to incur new credit obligations.

A bankruptcy that was caused by factors beyond your control could qualify for the Back to Work program. Applicants who show they have managed their finances responsibly can qualify just 12 months after their discharge.

VA home loans

VA mortgage lenders can disregard a bankruptcy over two years old, and will consider applicants one-to-two years after discharge if there were extenuating circumstances and the applicants re-establish their credit.

VA lenders may also shorten the waiting period for self-employed applicants whose businesses failed.

The applicants must have had no derogatory credit before self-employment or after the bankruptcy filing, they must have secured permanent employment.

Portfolio loans

Portfolio loans are mortgages that do not adhere to any guidelines set by lending agencies like Fannie Mae or FHA.

The loans are created and service by private banks who make their own rules.

Some lenders offer mortgages to applicants with “no seasoning” after a Chapter 7 or 13 bankruptcy. “Seasoning” refers to a waiting period, so no seasoning means you can get a mortgage the day after your bankruptcy is discharged.

Understand that lenders take on extra risk when they go outside of standard guidelines, and they charge higher rates to compensate for this.

Expect to pay between six and nine percent, depending on your credit score, down payment and other factors. Also note that loan-to-value ratios are lower; you’ll probably have to put at least 25 percent down.

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Mortgage Qualifying After Chapter 13 Bankruptcy

Chapter 13 bankruptcy is also called a reorganization bankruptcy. It’s an ongoing process in which you make monthly payments to a bankruptcy trustee, who redistributes them among your creditors. After five years (in most cases), any remaining unpaid debt is discharged.

Chapter 13 is considered a less detrimental bankruptcy, and many lenders impose shorter waiting periods.

However, if the lender’s waiting period doesn’t begin until the discharge date, you may go through five years in the repayment plan before receiving your discharge, and then have to wait two or more years before financing a home under these programs.

It’s important to note whether the clock starts on the filing date or the discharge date, because with a Chapter 13 bankruptcy, it makes a huge difference.

Conventional loans

Freddie Mac and Fannie Mae require a two-year waiting period from the discharge date, regardless of the cause of the filing.

The waiting period is five years from the discharge date for applicants with multiple bankruptcy filings, but only three years if there were extenuating circumstances.

Because it can take seven years from your filing date to become eligible for Fannie Mae or Freddie Mac mortgages, these loans are not the most attractive for homebuyers who have been through reorganizations.

FHA loans

FHA is considerably friendlier, requiring only that the applicants complete at least 12 of their court-mandated payments and get the approval of the bankruptcy trustee. There is no additional reduction for extenuating circumstances.

VA loans

VA mortgage lenders require 12 on-time bankruptcy plan payments. In addition, you need written permission to enter into a mortgage obligation from the bankruptcy court.

Since the waiting period is short, there is no further reduction for extenuating circumstances.

Portfolio lenders

Portfolio lenders tend to view Chapter 13 bankruptcy in a better light than Chapter 7 filings. While some lenders treat the two the same, others may require no waiting following the discharge date.

Some of these mortgage lenders don’t generally distinguish between Chapter 7 and Chapter 13 bankruptcies. If you filed a Chapter 13 bankruptcy, however, you’re almost certainly better off waiting 12 months and going with a government-backed mortgage.

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What About Bankruptcy Dismissals?

Sometimes, people file bankruptcy but then don’t complete the process. They might not comply with the court’s requirements, or their finances might improve to the point that they don’t have to file.

In that case, the bankruptcy is not discharged; it’s dismissed.

Dismissals are treated differently depending on the program. Fannie Mae and Freddie Mac require a four year waiting period for Chapter 13 dismissals in which the applicants failed to complete their repayment plans.

The waiting period for a dismissed Chapter 7 filing is only two years. Neither the VA nor FHA guidelines mention bankruptcy dismissal – only bankruptcies that have been discharged.

In addition, voluntary dismissals can be removed from your credit report altogether if you contact the credit bureaus and supply proof that you withdrew your petition and paid your debts.

What Are Today’s Rates?

Today’s rates present an opportunity for past bankruptcy filers. Low rates result in lower, more affordable payments – ones that make it easier to qualify after bankruptcy.

Request a quote, which comes with a home buying eligibility check. It takes only minutes to start, and all quotes include access to your live credit scores.

Time to make a move? Let us find the right mortgage for you

Gina Freeman
Authored By: Gina Freeman
The Mortgage Reports contributor
With more than 10 years in the mortgage industry, and another 10 years writing about it, Gina Freeman brings a wealth of knowledge to The Mortgage Reports as its Associate Editor. Gina works with a team of world-class real estate and finance writers to bring timely and helpful news and advice to the audience. Her specialty is helping consumers understand complex and intimidating topics.