Conforming Conventional Loan After Bankruptcy Requirements And Guidelines

This article covers conforming conventional (Fannie Mae and Freddie Mac) mortgages after bankruptcy. 

In general, the waiting period to qualify for a conventional mortgage after bankruptcy is longer than it is for an FHA home loan.  If you have a bankruptcy in your recent past, then, an FHA or other government-backed mortgage is the right loan to get your into a new home faster.

Sometimes, however, the conventional waiting period is shorter. You’ll need to go through the details of your bankruptcy to see which loan offers better terms for your situation.

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Conventional Mortgage Waiting Period After Bankruptcy

The waiting period for a mortgage after bankruptcy depends on three factors:

• The type of filing (Chapter 7 vs 13)
• Mitigating circumstances (fault)
• The presence or absence of a foreclosure filing in the bankruptcy

Here are the waiting periods for Fannie Mae and Freddie Mac (conforming loan programs).

Fannie Mae or Freddie Mac (Conforming Loans)
Bankruptcy Type	Waiting Period	Wait with Extenuating Circumstances
Chapter 7	4 years	2 years
Chapter 13	2 years from discharge date	2 years from discharge date
Multiple filings in 7 years	5 years	3 years

 

And here are the waiting periods for other loans.

FHA
Bankruptcy Type	Waiting Period	Wait with Extenuating Circumstances
Chapter 7	2 years from discharge date	12 months from discharge
Chapter 13	12 months of on-time payments	12 months of on-time payments
Including Foreclosure	3 years	3 years
VA
Bankruptcy Type	Waiting Period	Wait with Extenuating Circumstances
Chapter 7	2 years from discharge date	12 months from discharge
Chapter 13	12 months of on-time payments	12 months of on-time payments
Including Foreclosure	3 years	3 years
USDA
Bankruptcy Type	Waiting Period	Wait with Extenuating Circumstances
Chapter 7	3 years from discharge date	12 months from discharge
Chapter 13	12 months of on-time payments	12 months of on-time payments
Including Foreclosure	3 years	3 years

 

To qualify for shorter waiting periods, you’ll need to prove that the bankruptcy was not your fault (extenuating circumstances). Extenuating circumstances might include a company-wide layoff. They can also be a catastrophic medical event, or the death of the family breadwinner. However, divorce or the inability to sell your home don’t usually count as extenuating circumstances.

To qualify for a new loan, you’ll need to avoid all derogatory events since your bankruptcy — no late payments, collections, judgments or write-offs. In addition, you must get your credit score above 620 for conforming loans. And of course, higher is better. You should explain what steps you have taken to make sure that bankruptcy won’t happen again. And with a Chapter 13, you’ll need the permission of the Bankruptcy Court if you’re still paying into your plan.

Conforming Loans Versus Government Loans

Conforming loans are conventional (non-government) mortgages that are funded by private lenders and sold to investors by Freddie Mac and Fannie Mae. They are called conforming loans because they must conform to guidelines established by Fannie and Freddie.

In general, conforming home loans are harder to get following a bankruptcy. Their waiting periods are longer unless you can prove that the bankruptcy was not due to financial mismanagement on your part. However, conforming wait periods may be shorter if there are extenuating circumstances and there was a foreclosure included in the bankruptcy.

Private Mortgage Insurance Versus FHA MIP

FHA home loans have one really significant disadvantage — their mortgage insurance premium (MIP) requirement. You have to pay 1.75% of your loan amount upfront, plus a monthly mortgage premium for the life of your loan.

In contrast, a conventional loan requires mortgage insurance only until you pay down your mortgage to 80% of your sales price. And there is no upfront premium. To avoid getting stuck with MIP forever, you’ll need to either wait until you can get a conventional (non-government) mortgage or get an FHA loan and refinance it when you can meet the requirements of a conventional lender.

How Discharge and Dismissal Dates Work

The waiting periods start from the date that the bankruptcy is discharged. That’s the date that your debts are wiped out. For a Chapter 7 filing, your clock starts ticking almost immediately after filing because the discharge typically happens fast.

Note that discharge is different from dismissal. If a judge dismisses your Chapter 7 filing, it’s as though there was never a bankruptcy. So there is no waiting period. However, you’ll still have to meet credit scoring and other underwriting guidelines.

For Chapter 13 filings and conforming loans, it’s different. Chapter 13 payment plans run from three to five years. You file, pay into your plan, and after several years, you get your discharge. Then the clock starts on your waiting period. So if it takes you five years to discharge a Chapter 13, and then you have a two-year waiting period after the discharge, you can’t get a loan until seven years after filing.

For Chapter 13 bankruptcy dismissals and conforming loans, your waiting period is four years after dismissal. If you’re in a Chapter 13 bankruptcy, government-backed loans allow you to finance a home much sooner. Note that you’ll need the approval of the Bankruptcy Court.

Qualifying With Lender With No Overlays

Homebuyers or homeowners who need to qualify for a mortgage with a direct lender with no overlays on government and/or conventional loans can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

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