If you’ve had to file bankruptcy in the past, you’ve seen how difficult financial matters can become. You’ve tried to stay out of bankruptcy and keep your assets together. However, unfortunately, for one reason or another, you’ve not been able to do so.
The situation may have forced you to liquidate many of your possessions, including your home. You may have had to move into a rental property.
As bankruptcy gets further and further into the rear-view mirror and your life begins to piece itself back together, you may begin thinking about purchasing a home again. How long do you have to wait before you can get a purchase a home and get a mortgage? Let’s take a look.
First things first
It’s important to understand that while the process for getting a mortgage is much the same, the experience you have will likely be very different.
Because of your past bankruptcy, they may ask you to provide additional documentation. You may also need to have a cosigner, accept a higher interest rate or provide a larger down payment.
The fact is, your credit has taken a hit, and lenders will know that. Prepare yourself for higher prices and a longer process.
I’m prepared; how long do I have to wait?
Every financial institution is different. But generally, you’ll have to wait at least two years before you can purchase or home or obtain a mortgage after a bankruptcy.
Bankruptcies remain on your credit report for up to seven years. So when you go to apply for your mortgage, your lender or lenders will see the past history.
The mortgage industry often calls the waiting period “seasoning.” The idea is that your credit report, score, and history needs a bit of a maturation period between when you declare bankruptcy and when you can borrow again.
You’ll also note that the above says “at least two years.” This is purposeful. You can only acquire a federally-backed mortgage loan after two years of seasoning.
These include products by the Federal Housing Administration. It also includes products by The Veterans Affairs Department and United States Department of Agriculture.
Your new mortgage loan will still be serviced by a financial institution or bank. However, the loan is backed against default by a government agency. What this means is that if you fail to pay your mortgage again, default and lose your home, the government will make the lender whole.
If you want to go the conventional route, meaning not backed by a government, you’ll likely have to wait at least four years. You should not expect rates or terms to be as generous as you previously enjoyed.
Lenders will build in compensation for the eventuality of your default. This can sometimes include a larger than normal down payment.
Waiting periods also depend a great deal on the type of bankruptcy you filed.
Chapter 7, 11 & 13 Bankruptcy
A quick overview is in order. Chapter 7 bankruptcy is the type that we most often think of when we hear the word.
In Chapter 7, a trustee is appointed to your case and liquidates your assets. They distribute the proceeds to your creditors in order of preference. You can keep certain exempt property.
Chapter 11 bankruptcy is more common for businesses. That is because it allows them to restructure their debt for payment. It’s costly and time-consuming and consumers don’t use it as frequently.
Chapter 13 bankruptcy is another common type consumers use but instead of liquidating property, establishes a payment plan that the consumer must follow over three to five years. At the conclusion of the payment plan, they generally discharge your existing debts.
Chapter 12 is a final type of bankruptcy that takes elements from both 11 and 13, and is specifically for farmers and fisherman.
If you filed a Chapter 7 or 11 bankruptcy and can show that the bankruptcy was completely out of your control, you may be able to get a new mortgage loan in as little as two years. The definition of “out of your control” is quite subjective in this sense.
A good example, however, would be the loss of your job or a severe medical problem. If you filed a Chapter 13, things can be a bit more difficult. Your ability to take out a new loan depends on if your debt was dismissed or discharged at the conclusion of a payment plan. You’ll have to wait two years following the discharge date and at least four years from a dismissal date.
Waiting periods vary widely depending on the type of bankruptcy you’ve filed. Understanding the different rules and regulations about how long you need to wait and when you can expect to get a decent rate again is a critical point to understand before you begin shopping around. Bankruptcy can sometimes be the only way to begin to climb out of debt & improve your credit over time — buying a new home can be the cherry on the cake.