Can I Get a Mortgage After Bankruptcy and Foreclosure
This article covers buying a house and qualifying for a mortgage after bankruptcy and foreclosure. The mortgage industry underwent a major overhaul after the 2008 real estate and mortgage meltdown. The NMLS was created after implementing the SAFE Act and the New Banking Regulations.
The Dodd-Frank Act was passed, and the mortgage industry would never be the same again and would become the most regulated industry in the United States.
All mortgage loan originators had to undergo licensing requirements set by the NMLS. The loan officer had to take a 20-hour pre-licensing course. They also had to undergo an intensive criminal background check at the federal and state levels. Mortgage loan originators also had to undergo a financial background investigation, consisting of a credit check. The good news is that homebuyers can qualify for a mortgage after bankruptcy and foreclosure.
Sweeping Changes In Mortgage Regulations After Great Recession
Mortgage regulators reviewed each mortgage loan originator candidate’s credit report and looked for derogatory credit items. Each mortgage loan originator applicant had to explain the nature and reason for the derogatory information on their credit report.
Mortgage regulators would deny the loan originator’s license to those MLO applicants with bad credit. This was because they deemed them to be financially irresponsible.
Regulators labeled loan officer candidates with bad credit because they would not be fit to represent the public as mortgage loan officers. This was because they could not manage their finances. Unfortunately, many talented mortgage loan officers who went through a tough time financially due to the Great Recession of 2008 were denied mortgage loan originator’s licenses. Many were forced out of the mortgage industry.
How The Great Recession Impacted Home Ownership
The Great Recession of 2008 was more like the Second Great Depression of 2008. This is because never in history have there been so many Americans who filed for bankruptcy and went through foreclosure. The real estate market tanked. Millions of hard-working Americans lost their businesses and the jobs that they had held for decades.
Millions of those who retired were forced out of retirement and were forced to seek employment again to make ends meet.
Millions of homeowners who counted on the hard-earned equity they built in their homes have seen their home value diminish. Many homeowners had loan balances much higher than their homes’ value. You are not alone considering buying a house after bankruptcy and foreclosure. Countless hard-working folks in this country went through bankruptcy or foreclosure and have re-established themselves. They are now thinking of buying a house after bankruptcy and foreclosure.
How Can I Qualify For a Mortgage After Bankruptcy and Foreclosure
Many still have concerns that buying a house and getting a mortgage after bankruptcy and foreclosure will hinder their chances of getting a mortgage loan. This is absolutely not the case. People who have lost their homes in a prior foreclosure or had to file for bankruptcy can now qualify to purchase a home. However, there are mandatory waiting period requirements for buying a house after bankruptcy and foreclosure. If you have gone through a prior bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale, I will explain how to buy a house after bankruptcy and foreclosure on this blog.
Qualifying For Mortgage After Bankruptcy and Foreclosure
There are two types of bankruptcy consumer files: A Chapter 7 bankruptcy is also commonly known as a total liquidation bankruptcy. Chapter 7 Bankruptcy is where consumers with little or no assets choose to have either no income or limited disposable income to be able to pay their creditors. Consumers filing for Chapter 7 bankruptcy do not have to liquidate all of their assets.
The bankruptcy courts will let you keep your home, car, and personal assets under a certain value. However, suppose you have a lot of assets and equity in investment properties or other assets of value.
In that case, those assets will be liquidated by a bankruptcy trustee to pay off your creditors. For consumers with assets and income who want to protect those assets and need time to restructure their debts for five years, Chapter 13 bankruptcy is the route.
How Does Chapter 13 Bankruptcy Work
A Chapter 13 bankruptcy works because the bankruptcy court will appoint a bankruptcy trustee. The trustee will take a portion of the petitioner’s income. Proceeds will be used to pay your creditors over five years. Once the repayment period has been satisfied, which is normally five years, the balance of the remaining debts owed to creditors will be discharged. Bankruptcy discharge means the remaining debts will be wiped off. Consumers no longer owe any creditors and are now debt-free. A bankruptcy discharge means consumers are no longer obligated to pay any creditors and are debt-free. It normally takes 3 months to get a Chapter 7 bankruptcy discharged. A Chapter 13 bankruptcy is discharged once the repayment period is completed, normally five years.
Waiting Period Requirements For Mortgage After Bankruptcy and Foreclosure
A mandatory waiting period is required to qualify for a mortgage loan after bankruptcy. FHA loans, VA loans, and USDA loans require a mandatory waiting period after Chapter 7 bankruptcy of two years from the discharge date of the Chapter 7 bankruptcy. Fannie Mae and Freddie Mac, the two mortgage giants that set mortgage lending standards for conventional loans, require a four-year mandatory waiting period for borrowers. The waiting period is 4 years to qualify for a conventional loan after a Chapter 7 bankruptcy discharge date. There is no waiting period to qualify for an FHA, VA, or USDA loan after a Chapter 13 bankruptcy discharge date. However, Fannie Mae and Freddie Mac require a two-year mandatory waiting period after a Chapter 13 bankruptcy discharge date to qualify for a conventional loan. There is a four-year waiting period after the Chapter 13 dismissal date.
Lending Guidelines With Prior Mortgage Included In Bankruptcy
If you had a mortgage part of bankruptcy, you can qualify for a conventional loan four years after the discharge date of your Chapter 7 bankruptcy. This holds true even though the foreclosure or housing event was recorded after the Chapter 7 bankruptcy discharge date. The recorded foreclosure date or housing event does not matter with the prior mortgage part of Chapter 7 bankruptcy for qualifying on conventional loans. However, with FHA loans, if you had a mortgage as part of Chapter 7 bankruptcy, there is a three-year waiting period to qualify from the recorded foreclosure date. This is much later than the discharge date of Chapter 7 bankruptcy. Many lenders are not in a major hurry to transfer the homeowner’s name into their names. So many times, it may be years before a home buyer can qualify for an FHA loan. This is because the waiting period time clock does not start until the homeowner’s name has been transferred out of their name and recorded in the county’s recorder of deeds office.
Mortgage After Bankruptcy and Foreclosure Waiting Period Guidelines
Homebuyers can purchase a home after foreclosure. This holds true as long as they meet the minimum waiting period after foreclosure. Waiting periods after foreclosure differ depending on the loan program. FHA mandates a three-year minimum waiting period after foreclosure, deed-in-lieu of foreclosure, and short sale. The waiting period clock of three years starts from the recorded date of the foreclosure and deed-in-lieu of foreclosure or the date of the sheriff’s sale. The three-year waiting period after a short sale begins from the short sale date, which is reflected on the HUD Settlement Statement of the short sale home.
Fannie Mae and Freddie Mac on Mortgage After Bankruptcy and Foreclosure
Fannie Mae and Freddie Mac require a seven-year waiting period after foreclosure to qualify for a conventional loan. Again, the 7-year waiting period clock starts from the date that the deed of the property has been transferred from the homeowner’s name into the lender’s name. Or out of the homeowner’s name, into the name of someone else, or the date of the sheriff’s sale. Fannie Mae and Freddie Mac require a four-year mandatory waiting period after a deed-in-lieu of foreclosure or short sale to qualify for a conventional loan.
VA Waiting Period Requirements
The Department of Veterans Affairs, VA, requires a two-year mandatory waiting period after foreclosure or deed-in-lieu of foreclosure or short sale for a Veteran to qualify for a VA loan. USDA requires a three-year mandatory waiting period after foreclosure, deed-in-lieu of foreclosure, and short sale for a USDA home buyer to qualify for a USDA mortgage loan.
Frequently Asked Questions (FAQs)
1. Is it possible to get a mortgage after bankruptcy and foreclosure?
Yes, it is possible to get a mortgage after experiencing bankruptcy and foreclosure. However, there are specific waiting periods and criteria you must meet before qualifying for a new mortgage.
2. What are the waiting periods for getting a mortgage after bankruptcy?
The waiting periods vary depending on what kind of bankruptcy and mortgage:
*Chapter 7 Bankruptcy: Typically 2 years after discharge for FHA and VA loans, 4 years for conventional loans.
*Chapter 13 Bankruptcy: Usually 1 year into the repayment plan with court approval for FHA and VA loans, 2 years after discharge for conventional loans.
3. What are the waiting periods for getting a mortgage after foreclosure?
The waiting periods for foreclosure also depend on the type of mortgage:
*FHA Loans: 3 years from the foreclosure date
*VA Loans: 2 years from the foreclosure date
*Conventional Loans: 7 years from the foreclosure date
4. Are there any exceptions to the waiting time?
Some lenders may offer exceptions to the standard waiting periods under specific circumstances, such as significant extenuating circumstances (e.g., job loss, medical emergencies) that led to bankruptcy or foreclosure. Documentation and a solid explanation will be required.
5. What possible steps can I take to enhance my chances of getting a mortgage after bankruptcy and foreclosure?
To improve your chances:
*Rebuild Your Credit: Establish and maintain a good credit report by paying bills on time and reducing debts.
*Prepare for a Down Payment: A bigger down payment can enhance your appeal as a borrower.
*Stable Employment and Income: Maintain steady employment and income to show financial stability.
*Work with a Mortgage Professional: Seek advice from a professional who can guide you.
6. Will my interest rate be higher after bankruptcy and foreclosure?
Initially, you may face higher interest rates due to the perceived risk. However, as you rebuild your credit and demonstrate financial stability, you may qualify for better rates over time.
7. What type of mortgage is best after bankruptcy and foreclosure?
FHA and VA loans are often considered more accessible options for individuals who have undergone bankruptcy and foreclosure due to their more lenient credit requirements and shorter waiting periods. However, the best option depends on your specific circumstances.
8. Can I apply for a mortgage while still in Chapter 13 bankruptcy?
Yes, you can avail of a mortgage while in Chapter 13 bankruptcy. Still, you need court approval and a history of on-time payments under your repayment plan. FHA and VA loans are more commonly accessible under these circumstances.
9. How does foreclosure impact my credit score?
Foreclosure can significantly lower your credit score, often by 100 points or more. The impact diminishes over time as you rebuild your credit with positive financial behavior.
10. What documentation will I need to apply for a mortgage after bankruptcy and foreclosure?
You will need to provide:
*Proof of income (pay stubs, tax returns)
*Bank statements
*Documentation of bankruptcy discharge or completion of the Chapter 13 repayment plan
*Explanation of the circumstances that led to bankruptcy and foreclosure
11. How long does rebuilding credit after bankruptcy and foreclosure take?
Rebuilding credit may take several years, but positive financial habits, such as timely bill payments, low credit card balances, and having no new debt, can speed up the process.
12. Can I get a mortgage with a co-signer after bankruptcy and foreclosure?
Yes, having a co-borrower with good credit can enhance your chances. It may help you secure a better interest rate.
13. Are there any programs specifically designed for people with a history of bankruptcy and foreclosure?
Some programs, like FHA’s “Back to Work” program, are designed to help individuals who have experienced financial hardship and can document the reasons for recovery. These programs can shorten waiting periods and provide more lenient requirements.
14. What is the impact of a short sale compared to foreclosure on getting a mortgage?
A short sale generally damages your credit score less than a foreclosure. There may be shorter waiting periods for getting a new mortgage. FHA loans typically require a 3-year waiting period after a short sale, while conventional loans may require 4 years.
15. Should I seek pre-approval before starting my home search?
Yes, seeking pre-approval can help you clearly understand what you can afford and show sellers that you are a serious buyer. It also helps identify any possible issues early in the process.
Mortgage Lenders With No Overlays
Homebuyers considering buying a house after bankruptcy and foreclosure need a mortgage company with lenient guidelines and no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates is licensed in multiple states and offers non-QM loans and alternative mortgage programs. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays, to take your calls and answer any questions you may have.
