Purchasing A Property After A Bankruptcy
If you have filed for bankruptcy protection in the past, you may worry that you will never be able to purchase a property or qualify for a mortgage. But fortunately, that is not the case and you don’t need to worry. A bankruptcy on your credit report does not automatically disqualify you from obtaining mortgage financing. It just comes down to “seasoning” or a “waiting period” after your bankruptcy is discharged or dismissed. And, even better, in some cases there is no seasoning required at all!
What Is “Bankruptcy Seasoning?”
As mentioned above, seasoning is the amount of time that must pass after a bankruptcy is discharged or dismissed before you can be approved for a mortgage. Lenders enforce bankruptcy seasoning requirements to ensure that you have enough time to rebuild your credit and demonstrate your ability to responsibly manage your 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 type of mortgage you are applying for. If, however, you have a large enough down payment or enough equity, you can skirt the seasoning requirements altogether, and we will explain more below.
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 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 or debtors (if there are proceeds left over after debts are paid). **Note: this does not mean you will lose your home or even your car. There are “exemptions” in place that prevent the court from liquidating everything. Your home in particular is safe if you are current with your mortgage payments.
Chapter 13 bankruptcy is also known as a “wage earners” bankruptcy. This type of bankruptcy enables individuals with regular incomes to develop a plan to repay all or part of their debts—usually over a period of 3 to 5 years.
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 mortgage and type of bankruptcy.
Bankruptcy Seasoning For FHA Loans
Chapter 7 Bankruptcy
A two-year waiting period from the discharge date is required for obtaining an FHA loan. Remember that the discharge date is not the date that you filed for bankruptcy protection; it is the date the court officially discharges your bankruptcy. Remember too that you need to re-establish your credit after the bankruptcy is discharged if you want to qualify for a mortgage.
Chapter 13 Bankruptcy
From filing date: The seasoning or waiting period from the filing date of a Chapter 13 bankruptcy filing is effectively at least one year – while a borrower is in the bankruptcy plan. Borrowers can obtain an FHA mortgage while in a Chapter 13 bankruptcy, but borrowers must prove that at least 12 months’ worth of payments have been made to the Trustee per the bankruptcy repayment plan. Borrowers 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 formally approve the new mortgage. Note that these steps are not as difficult as they might seem and a skilled mortgage lender can walk you through them.
From discharge date: If borrowers do not obtain a mortgage while they are in their Chapter 13 bankruptcy and instead wait until it is discharged, they will need to wait a full year from the discharge date. Note: This is why we often encourage borrowers in need of FHA financing to obtain a mortgage while they are still in their bankruptcy; once it is discharged, they have to wait a full year.
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. Once again, you must re-establish credit after your bankruptcy if you want to qualify for a mortgage.
Exceptions for Extenuating Circumstances
A two-year waiting period from the discharge or dismissal date is permitted if extenuating circumstances can be explained and documented.
Chapter 13 Bankruptcy
A two-year seasoning period is required from the Chapter 13 discharge date. You cannot obtain a conventional mortgage while you are in a Chapter 13 bankruptcy.
Jumbo Loans
For all types of bankruptcies, most jumbo lenders require a minimum seasoning period of 4-7 years, depending on the lender or the requirements of a particular jumbo loan program.
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: There is no waiting period to obtain a VA loan from the Department of Veterans Affairs.
When Do You Need No Seasoning After A Bankruptcy Filing or Discharge?
You will need no seasoning, irrespective of the type of bankruptcy or the timing of the filing or discharge, if you have a substantial down payment for a purchase or substantial equity for a refinance. You would need a down payment of at least 35% to 40% for a purchase, and you would need an equity cushion that is similarly large for a refinance.
You will also need to convince the lender that you have the ability to repay, the ability to re-establish your credit, and the ability to refinance out of the mortgage loan within one to two years, as these mortgage loans are short-term in nature. You should also be aware that the mortgage loans available in these situations have much higher interest rates and fees. There are no conventional or FHA loans available in these situations, no matter how much equity you have.
How Does Bankruptcy Affect Your Mortgage?
Unfortunately, a bankruptcy negatively affects your credit score, which in turn can negatively impact the interest rate for your mortgage. A very low credit score can also make qualifying for a mortgage more difficult. In addition, a bankruptcy can stay on your credit report for up to ten years.
Once your bankruptcy is discharged or dismissed, you will need to rebuild your credit by setting up “secured credit cards” (where the credit card lender holds cash as collateral) and by taking out other types of installment loans wherever possible. In most cases, after a bankruptcy, mortgage lenders will want to see at least a two-year history of on-time payments, at least three credit accounts, and credit card balances that are not consistently close to the credit limits. For ideal credit, you would want to keep your credit card balances under 30% of the credit card limits.
FHA loans typically require credit scores above 580 at least, while conventional lenders like to see credit scores above 620. And once again, even if your payments are on time, if you consistently keep your credit card balances near your credit limits, your score will be negatively impacted.
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, down payment percentages (for a purchase), equity levels (for a refinance), debt-to-income ratios, credit scores, 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.
