During the recession, many Americans were forced to file bankruptcy. In 2010 alone there were around 1.5 million bankruptcy filings (read report here). Because of the mandatory waiting periods, many people are now becoming eligible to apply for a mortgage once again. By understanding the process of taking on a mortgage after a bankruptcy, you can make an informed decision on how to handle your own situation.
Unfortunately, when you file for bankruptcy, it can take years before you’re eligible to apply for a mortgage. Even then, your credit score could have taken such a hit that your interest rate would be outrageous. If you’re dedicated to rebuilding your credit and you set a goal for yourself, however, it is possible to get your personal finances in check. You can then prepare yourself for applying for a new mortgage in the future.
Discharging Debt & Rebuild Credit
The first step when you file bankruptcy is discharging all the debt. If you are still in the middle of a bankruptcy, there’s no lender that will even begin to consider your application for a mortgage. In a Chapter 7 bankruptcy filing, you are forced to liquidate most or all of your assets in order to repay your outstanding debts, they also incur a longer waiting period before becoming eligible for a loan again. Chapter 13 bankruptcy filings do not require liquidation of assets and instead create a court mandated payment plan over a three or five year timetable.
After bankruptcy, it can seem nearly impossible to build your credit score back up to where it was prior to filing, we’ve written about this here. It’s important to work on rebuilding your credit because bankruptcy is extremely damaging. Your goal is to prove to your creditors and potential lenders that you can be trusted to pay back your debts. Two great ways to do this are with a secured credit card or an installment loan.
A secured credit card only lets you borrow the amount of money that you have deposited with the issuing bank. Your credit is limited to your actual funds, but is a way to build your credit score without risking being unable to pay back your debts. Another ideal credit builder is paying off installment loans. These could be student loans, car loans or even personal loans. By paying your installment on time each month, you automatically strengthen your credit score.
Applying for a New Mortgage
Once you’ve made a plan for rebuilding your credit and you stay on target, there are still mandatory waiting periods for many mortgages. According to the guidelines set forth by Fannie Mae, if you filed a Chapter 7 liquidation bankruptcy, then your waiting period is four years and if you filed a Chapter 13 bankruptcy, then your waiting period is two years. The waiting times for Federal Housing Administration loans are slightly shorter with two years for a Chapter 7 bankruptcy and one year for a Chapter 13 filing.
When you’ve decided it’s time to apply for another mortgage, be sure of a few things. You have to be certain that you meet the lender’s loan application criteria. You should have a stable income and a good amount of time at your current job. Generally, they want to see that you’ve built your credit score in the time since you filed for bankruptcy. A large down payment is a great way to make your application look better.