13
May

credit repair

Ironically, bankruptcy does not preclude credit offers. On the contrary, many credit card issuers and auto lenders market directly to recent filers since the law prevents them from filing again for several years, thus guaranteeing a captive debtor.

When it comes to obtaining a mortgage though, much depends on the lender. In mortgage terms, a bankruptcy is a “significant derogatory event.” Lenders who offer FHA loans (loans backed by the Federal Housing Authority) or loans that are sellable to Fannie Mae are mandated to impose certain waiting periods after any significant derogatory event. If a borrower can show compelling evidence of extenuating circumstances (such as a catastrophic illness or job loss), the waiting period might be shorter. But these exceptions are rare.

Waiting periods begin at the completion of the significant derogatory event: bankruptcy dismissal or discharge, or completion of a foreclosure, deed-in-lieu of foreclosure, or short sale.

Waiting periods

Bankruptcy Chapter 7 or 11

For conventional and Fannie Mae mortgages, the waiting period is four years; two years under extenuating circumstances. For FHA loans, the waiting period is two years; one year under extenuating circumstances. For VA loans, the waiting period is two years but additional restrictions apply.

Bankruptcy Chapter 13

For conventional and Fannie Mae mortgages, the waiting period is two years from discharge or four years from dismissal; two years under extenuating circumstances for a dismissal and no exception for a discharge. For FHA and VA loans, the waiting period is one year, and the court must approve the mortgage.[1]

Multiple bankruptcy filings

The waiting period is five years from the most recent discharge or dismissal; three years under extenuating circumstances.

Foreclosure

For a conventional mortgage, the waiting period is five years. For a Fannie Mae mortgage, the waiting period is seven years; three years under extenuating circumstances (but additional requirements apply). If the foreclosure was part of a bankruptcy, the lender has the option to apply the shorter (bankruptcy) waiting period. For FHA loans, the waiting period is three years; for VA loans, two years.

Deed-in-Lieu of Foreclosure

For a conventional mortgage, the waiting period is five years. For Fannie Mae mortgages, the waiting period depends on the loan to value (LTV) ratio: two years with 80% maximum LTV; four years with 90% maximum LTV; seven years otherwise. The waiting period is shortened to two years under extenuating circumstances for 90% LTV loans. For FHA loans, the waiting period is three years; for VA loans, two years.

Short Sale

For a conventional mortgage, the waiting period is two years. For Fannie Mae mortgages, the waiting period depends on the loan to value (LTV) ratio. Two years with 80% maximum LTV; four years with 90% maximum LTV; seven years otherwise. The waiting period is shortened to two years under extenuating circumstances for 90% LTV loans. For FHA loans, the waiting period is three years; for VA loans, two years.

Critical steps for getting a mortgage after bankruptcy

Even after the required waiting period passes, the borrower may not qualify for a mortgage. Lenders consider many other factors in the loan approval process.

  • Establish two years of solid financial stability. Obtain new credit, make all payments on time and maintain steady employment and a steady place of residence for two years or longer.
  • Keep debt very low. A mortgage depends, in part, on the total amount of your monthly debt payments in relation to your income.
  • Consider applying for an FHA loan. The lowest market interest rate may not be available, but credit and down payment requirements are lower.
  • FHA and VA loan eligibility may not be restored. If the significant derogatory event rendered a government-backed loan not fully paid off, the borrower may not be eligible for a new government-backed loan until the prior debt is repaid.
  • Make a long range credit improvement plan. The expiration of a waiting period isn’t necessarily the best time to get back into a mortgage. Competitive rates are available only to borrowers who qualify, and the waiting period may not be long enough to reestablish good credit.

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