Bankruptcy and a New Mortgage
How Long After Bankruptcy May You Become Eligible for a New Mortgage?
The simple answer: It depends.
If you lost a home during the recession, you may be eligible to buy a new one sooner than you think. Although before the recession, several of our clients secured new financing on or about the one year anniversary of filing a chapter 7 case, commercial lenders are no longer as generous.
In general, the rules now require that you wait three years. Depending, however, on the reason you lost your house, the delay may be shorter. You may qualify within a minimum of 2 years if your loss was caused by “extenuating circumstances“that were demonstrably beyond your control.
“Life –changing events” making it impossible to make payments might include:
- Job loss
- Serious illness
- Death of a wage earner
Events that won’t count include:
- Business failure
- Being overwhelmed with too much debt
But, your eligibility also requires that you demonstrate outstanding credit since the filing date of your bankruptcy case by showing a good payment history (it doesn’t hurt to pay bills 2 or 3 days early) and sufficient income to afford the payments (no more liar’s loan allowed!). So don’t close your accounts and operate only on cash. Your payment history is essential to demonstrate to a prospective lender that you are a good credit risk so work hard to develop a credit report that reflects timely made payments for rent, utilities and cell phone bills and trade lines. It will help if you acquire a credit card with a low or modest credit limit if your charges are timely paid, in full, each month. Again, paying a few days early helps bolster your FICA score.
In addition, the time required to obtain commercial credit depends on the kind of mortgage you seek. In general, the wait is shorter with government guaranteed financing. For instance, mortgages insured by the VA (Dept. of Veterans Affairs) aren’t affected by short-sales. And, if you filed chapter 13, the minimum wait for VA financing is 12 months if the new loan is approved by the bankruptcy court. If you filed chapter 7, the wait is usually 24 months– or less if you can demonstrate “extenuating circumstances.”
If you aren’t an armed forces veteran and, therefore, not eligible for a VA loan, look for typically low down payment financing insured by the Federal Housing Administration. Like the VA, FHA loans have essentially the same rules for bankruptcy debtors—at least one year for chapter 13 and two years for chapter 7. If you lost your home through a short-sale, deed-in-lieu or foreclosure, however, you’ll wait three years unless you can show “extenuating circumstances.”
Wait times with conventional loans purchased by Fannie Mae or Freddie Mac are structured over periods of time ranging from 24 to 84 months, as follows:
- 24 months for borrowers who suffer a life event such as a short sale or other extenuating circumstance or after a chapter 13 discharge or after the dismissal or discharge of a single bankruptcy case or after a short sale, deed-in-lieu or other significant adverse credit event;
- 36 months if you can reestablish an acceptable credit report following a foreclosure sale or more than one bankruptcy filing in 7 years;
- 48 months with no extenuating circumstances, after a deed in lieu, foreclosure or short-sale of a defaulted mortgage and for all other derogatory credit events;
- 60 months if the borrower filed more than one bankruptcy case in the past seven years; or
- 84 months if the borrower suffered financial problems caused by his or her financial mismanagement after a foreclosure.
Remember, when seeking new financing after a negative credit event, you must be able to show perfect post-event credit for a period of at least two years, good income demonstrating an ability to make payments on the new loan and convincing evidence that the cause of the event was unrelated to your own unjustified poor credit management.
This material was adapted, in part, from the article by Lew Sichelman titled “Getting a mortgage after bankruptcy or foreclosure,” LATimes.com/business, January 24, 2013.
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