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Bankruptcy Seasoning Requirements For Mortgages

Purchasing A Property After A Bankruptcy

If you have had to file for a bankruptcy case in the past, you may worry that you will never be able to purchase a property or qualify for a mortgage. Good news! A bankruptcy on your credit report does not automatically disqualify you from obtaining mortgage financing, and your bankruptcy needs to “season” before you can obtain mortgage financing.

What Is “Bankruptcy Seasoning?”

Seasoning is the amount of time that must pass after a bankruptcy before you can be approved for a mortgage. Bankruptcy seasoning requirements ensure that you have ample time to rebuild your credit and demonstrate your ability to responsibly manage finances and various types of debt. The bankruptcy seasoning period is typically between 2 and 7 years, based on the type of bankruptcy filed and the financing you are applying for.

Bankruptcy Seasoning Factors

As discussed above, the bankruptcy seasoning period depends on two main factors: the type of bankruptcy and the type of financing you are trying to obtain.

The first factor is the kind of bankruptcy that you experienced. There are two main types of personal bankruptcy within the US: Chapter 7 and Chapter 13 Bankruptcy.

Chapter 7 bankruptcy is a “debt liquidation” bankruptcy, and it does not involve filing a repayment plan. This means that the court takes legal control of your property and possessions, sells them, and then passes the proceeds to the creditors/ debtors.

Chapter 13 bankruptcy is a “wage earners” bankruptcy. This type of bankruptcy enables individuals with regular income to develop a plan to repay all a part of their debts.

The type of financing you are trying to obtain is the other factor that influences how long a bankruptcy must season. Jumbo financing has the strictest bankruptcy seasoning requirements, while conventional loans are a little less stringent. Government-backed loans, FHA, and VA are the least stringent in terms of bankruptcy seasoning.

Bankruptcy Discharge Vs. Dismissal

We should review the difference between a bankruptcy discharge and a bankruptcy dismissal. A bankruptcy discharge is a legal order that your unsecured debts are, hereafter, unenforceable. Your legal obligation to pay is wiped out. While a bankruptcy dismissal means that your bankruptcy has been stopped before the court granted a discharge order. A bankruptcy dismissal occurs when a bankruptcy filer fails to meet a requirement of the bankruptcy code.

Bankruptcy Seasoning For Different Mortgage Loans

Below is a breakdown of bankruptcy seasoning periods based on the type of financing and type of bankruptcy.

Bankruptcy Seasoning For FHA Loans

  • Chapter 7 Bankruptcy: A two-year waiting period from the discharge date is required. Remember that the discharge date is not the date that you filed the bankruptcy but the date the court officially discharged your bankruptcy.
  • Chapter 13 Bankruptcy: A waiting period of only 0 years with court approval is required if the borrower is still in bankruptcy. To use an FHA loan, the borrower must prove that at least 12 months’ worth of payments has been made per the bankruptcy repayment plan. They must also verify that the bankruptcy resulted from a significant, one-time economic event and that steps have been taken to avoid a similar event in the future. The trustee or bankruptcy judge must also okay and sign off on this.

Bankruptcy Seasoning For Conventional Loans

  • Chapter 7 Bankruptcy: A four-year waiting period is required, measured from the discharge or dismissal date of the bankruptcy action.
  • Exceptions for Extenuating Circumstances: A two-year waiting period is permitted if extenuating circumstances can be documented and measured from the discharge or dismissal date of the bankruptcy action.
  • Chapter 13 Bankruptcy: Two years from the discharge date or four years from the dismissal date.
  • Jumbo Loans: For all bankruptcies, most investors require a minimum waiting period of 4-7 years. However, this can vary from investor to investor.

Bankruptcy Seasoning For VA Loans

  • Chapter 7 Bankruptcy: The bankruptcy must be dismissed or discharged for two years before you apply for a VA loan.
  • Chapter 13 Bankruptcy: No waiting period is needed to use a loan from the department of Veteran Affairs (VA loan).

How Does Bankruptcy Affect Your Mortgage?

Unfortunately, a bankruptcy negatively affects your credit score and the interest rate you may qualify for, and the bankruptcy will stay on your credit report for ten years. Usually, you will need a few years of consistent on-time payments to rebuild your credit to a place where you can obtain a good credit score and mortgage financing.

If you’re planning to apply for a mortgage after experiencing a bankruptcy, work on building up your credit again. You will need a minimum FICO credit score range of 580- 620 to qualify for mortgage financing, depending on the type of mortgage.

We also recommend that you keep your overall debt as low as possible. Most lenders want to see credit utilization below 30% to improve your credit score and pay all your debt on time. High credit card utilization and late payments will negatively impact your credit score.

Bankruptcy Seasoning Summary And Next Steps

If you or someone you know has recently declared bankruptcy, contact a lender and discuss your financial situation. It’s important to note that bankruptcy seasoning is just one of the many factors that go into a lender’s decision when evaluating a mortgage application. Other factors include employment history, debt-to-income ratios, credit score, and assets.

If you’d like to learn more about this, please reach out to us directly at 855-855-4491 or directly on our website to talk to one of our Client Advisors.

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