On our blog this week we are discussing “life after bankruptcy.” On Monday, we highlighted rebuilding credit and establishing emergency savings after bankruptcy. Yesterday, we discussed qualifying for an auto loan after either filing for Chapter 7 or Chapter 13. Today, we outline qualifying for a home loan.
Like with auto loans, consumers who have gone through bankruptcy can expect to pay a slightly higher interest rate on their mortgage loans. The general opinion is that a consumer who has re-established good credit can qualify for a mortgage loan 18 to 24 months after a personal bankruptcy discharge.
However, the Federal Housing Administration (FHA), which provides a majority of the mortgage loans to low-to-moderate income homebuyers in the U.S., has special rules when it comes to qualifying for a mortgage after a bankruptcy.
Following a Chapter 7 bankruptcy discharge, a consumer with a good payment history can qualify for an FHA-insured mortgage after two years. It is possible for the FHA to approve the mortgage after one year if: the bankruptcy was caused by something out of the homebuyer’s control (such as illness or job loss), the homebuyer has demonstrated financial responsibility and the circumstances that led to the bankruptcy are not likely to occur again.
Following a Chapter 13 bankruptcy, a consumer may be able to qualify for an FHA-insured mortgage if it has been more than a year since the bankruptcy payout period began, the payments have been made in a timely and consistent manner, and the bankruptcy court has granted permission.
Finally, it is usually not possible to qualify for an FHA-insured mortgage if the homebuyer has gone through foreclosure or has surrendered a home through a deed in lieu of foreclosure within the past three years. Although an exception may be possible if the foreclosure resulted from instances out of the homeowner’s control, such as illness, job loss or military deployment, and the homebuyer has re-established their credit.
Note: It’s very important to be wary of predatory lending tactics that prey on individuals with poor credit. According to the spokeswoman for the National Association of Realtors, it’s important to seek out information about the different mortgage programs available by speaking with a lender and checking with the Better Business Bureau.
Source: Bankrate.com, “Bankruptcy timeline: Rebuilding credit,” Brigitte Yuille, June 2, 2014