How Bankruptcy Affects Home Loan Approvals
When it comes to getting qualified for a home loan, a bankruptcy can play a major role in your ability to get approved. There are several factors that a bankruptcy has on the loan process. Knowing what to expect can help you improve your chances for a home loan approval.
The Waiting Period
If a person has filed bankruptcy, it will be more difficult to get approved for a home loan. Many loan programs will require a waiting period from the time the bankruptcy has been discharged before the loan can be approved. Depending on what type of bankruptcy that you filed will depend on how long the waiting period will be. If you filed a chapter 7 bankruptcy, then you will have to wait at least two years from the discharge date before the mortgage can be approved. The two year waiting period is based on a FHA home loan. A conventional home loan will require a four year waiting period.
If you have filed a chapter 13 bankruptcy, the waiting period is still the same on a conventional home loan, but on a FHA loan, there is a way to finance a home while still in chapter 13 bankruptcy. FHA mortgage programs will consider the filing date when calculating the waiting period. A chapter 13 bankruptcy customer can get approved for a loan after one year from filing the bankruptcy. Since many clients are still in chapter 13 bankruptcy after one year, you must get approval from the trustee of your case, that you can add an additional debt like a home loan. Without the trustee approval, you will not get approved for the mortgage loan.
All mortgage loan approvals with customers still in chapter 13 bankruptcy require manual underwriting and must follow the FHA guidelines.
Reestablishing Positive Credit
For many clients that file bankruptcy, the toughest step in getting a loan approved is that many lenders require that the customer has reestablished a positive credit history since the bankruptcy. Reestablishing credit history must also show no new derogatory accounts since the bankruptcy. For example, if you have a bankruptcy that was discharged in 2009 and in 2010, your car was repossessed, then you will not get approved for a home loan.
Reestablishing new credit history usually consists of at least a car loan and a revolving credit account. Make sure to keep your credit card account balance below 10% of the actual credit limit. Home loans require the reestablishment of credit for qualification.
There are other mortgage loan programs besides FHA loans and conventional home loans that have different guidelines when considering a bankruptcy. These types of mortgages are considered non-traditional home loans and many of these programs require a large down payment. Loan rates on these programs are also usually 2 to 3 percent higher than a normal conventional home loan.
Avoid New Derogatory Credit
The most important thing to remember after a bankruptcy is to reestablish credit and do not have any new negative accounts since the bankruptcy was filed. You want to show the loan company that the bankruptcy was an once in a lifetime event and will not happen again. If the loan company believes that there is a habit of bad credit or the likelihood of filing bankruptcy again, the mortgage loan will be turned down.
Bankruptcy is not a mortgage killer, but if you have filed bankruptcy in the last seven years, it is important to make sure that you are doing everything necessary to have good credit, especially if you want to purchase and finance a new home.
David White is a Senior Mortgage Loan Officer who assist his clients with their Home Loans. David specializes in FHA Home Loans which helps customers who have filed bankruptcy in the past. David has over 12 years experience in the finance industry.
