Filing for bankruptcy is a significant decision that can impact various aspects of your financial life, including your mortgage. Whether you’re currently struggling with your mortgage payments or considering bankruptcy as a solution to your financial woes, understanding how bankruptcy affects your mortgage is important. This blog post will address common questions about bankruptcy and mortgages, offering insights into the implications and potential paths forward.
What Are the Different Types of Bankruptcy?
When discussing bankruptcy, it’s essential to differentiate between the two most common types: Chapter 7 and Chapter 13. Each has distinct implications for your financial situation and, subsequently, your mortgage.
Chapter 7 Bankruptcy
Chapter 7, often referred to as “liquidation” bankruptcy, involves selling off non-exempt assets to pay creditors. This type of bankruptcy is designed for individuals who lack sufficient income to repay their debts. Under Chapter 7, most of your debts are discharged, meaning you are no longer legally obligated to repay them.
But – how does bankruptcy affect your mortgage loan? In Chapter 7, your mortgage lender retains the lien on your property, meaning they can still foreclose if you do not keep up with your payments. Chapter 7 bankruptcies do not leave you destitute. You will be able to keep your car and much of your personal property in most cases.
Chapter 13 Bankruptcy
Chapter 13 is known as the “reorganization” bankruptcy. Instead of liquidating assets, this type allows you to create a repayment plan to pay back creditors over three to five years. It’s typically suited for individuals who have a regular income and can afford to pay back a portion of their debts.
So – how does bankruptcy affect your mortgage in this scenario? You include your mortgage in the repayment plan, which can help you catch up on missed payments without losing your home. But, you still need to keep up with your mortgage payments. Creditors with mortgage liens can still foreclose even if you are in Chapter 13 – if you do not make your mortgage payments.
How Does Chapter 7 Bankruptcy Affect My Existing Mortgage?
Filing for Chapter 7 bankruptcy can have a significant impact on your mortgage, but it doesn’t necessarily mean you will lose your home. Here’s what you need to know:
Exempt vs. Non-Exempt Property
Your property will be categorized as either exempt or non-exempt. Exempt properties can be kept throughout the bankruptcy process, provided you stay current on your mortgage payments. Non-exempt properties might need to be surrendered or their value paid in cash.
For the purposes of bankruptcy, exemption laws protect a certain amount of equity in your home – preventing credits from forcing the sale of your home. The exemption amounts vary from state to state, and some states have no exemption laws at all. Ironically, if your equity exceeds your state’s exemption amount (you have “too much equity”), it is more likely that the creditors or the bankruptcy trustee will force the sale of your home.
Loan vs. Lien
When you take out a mortgage, the lender places a lien on your property. While Chapter 7 bankruptcy discharges your obligation to repay the loan, it doesn’t eliminate the lien. Therefore, if you fail to continue paying your mortgage, the lender can still foreclose on your home.
State and Federal Exemptions
Exemptions are determined by state or federal homestead exemptions, which protect a certain amount of equity in your home. The specifics vary by state, so consulting with a bankruptcy attorney is essential to understand your options.
How Does Chapter 7 Bankruptcy Affect Getting a Mortgage in the Future?
Chapter 7 bankruptcy stays on your credit report for up to ten years, making it challenging to get approved for a new mortgage during this time. However, with consistent effort to rebuild your credit, it’s possible to qualify for a home loan after the waiting period (discussed below).
What Happens to My Mortgage in Chapter 13 Bankruptcy?
Chapter 13 bankruptcy offers more flexibility in dealing with your mortgage. Here’s how it works:
Repayment Plan
Under Chapter 13, you include your mortgage in the repayment plan, allowing you to catch up on missed payments over time. This plan needs to be approved by the bankruptcy court.
Automatic Stay
When you file for Chapter 13, an automatic stay is issued, halting foreclosure proceedings and giving you time to reorganize your debts. However, you must stay current on mortgage payments moving forward.
Long-Term Plan
As long as you adhere to your repayment plan and keep up with mortgage payments, you can retain your home. This makes Chapter 13 a viable option for homeowners with significant equity in their property.
How Does Bankruptcy Affect Getting a Mortgage After Chapter 13?
The waiting period after Chapter 13 bankruptcy is typically shorter than Chapter 7 – and you can actually obtain a mortgage while you are in Chapter 13. You might be eligible for an FHA or VA loan as soon as one year after filing, provided you have made 12 months of on-time payments and received court approval.
Can You Get a Home Loan After Bankruptcy?
The ability to obtain a home loan after a bankruptcy is discharged is a common concern. While bankruptcy does pose challenges, it’s not impossible to obtain a mortgage once the required waiting periods have run and as long you have re-established your credit. Rebuilding your credit is essential after bankruptcy. Using a secured credit card, keeping your debt-to-income ratio low, and making all payments on time can help improve your credit score over time.
The type of bankruptcy and the waiting periods required before applying for a new mortgage are set out below.
Chapter 7 Bankruptcy
- FHA: 2 years from discharge
- Conventional: 4 years from discharge
- Jumbo: 4 or more years depending on the lender
Chapter 13 Bankruptcy
- FHA: 1 year from discharge
- Conventional: 2 years from discharge
- Jumbo: 4 years or more in most cases
Frequently Asked Questions
Can I get a home loan if I filed for bankruptcy?
Yes, you can. However, you must meet certain waiting periods and demonstrate improved credit and financial stability.
How long do I have to wait to get a home loan after bankruptcy?
It depends on the type of bankruptcy and loan. For FHA and VA loans, it’s typically two years after Chapter 7 discharge and one year after Chapter 13 filing or after a Chapter 13 discharge. If you are in Chapter 13 now and looking to get a mortgage, you should explore your options now before your Chapter 13 is discharged; if you allow your Chapter 13 to be discharged, you will have to wait a full year from the discharge date to obtain a mortgage.
How does bankruptcy affect getting a mortgage for the first time?
First-time buyers who have filed for bankruptcy face stringent credit checks and higher interest rates. It’s crucial to rebuild your credit and demonstrate financial stability before applying.
How does filing bankruptcy affect your mortgage if you are behind on payments?
Filing for bankruptcy can halt foreclosure proceedings and give you time to catch up on missed payments. This is especially the case under Chapter 13, as Chapter 13 plans allow you to include arrears in your repayment plan.
How does filing for bankruptcy affect my mortgage if I want to refinance?
Refinancing after bankruptcy can be challenging but not impossible. You must wait for the required period (discussed above), rebuild your credit, and meet the lender’s criteria for refinancing.
What are my loan options after bankruptcy?
You can explore FHA, VA, USDA, and conventional loans. Each has different requirements and waiting periods post-bankruptcy, but FHA and VA tend to have the most lenient guidelines when it comes to bankruptcies.
Can you get a home loan during bankruptcy?
Yes, you can. But only if you are in Chapter 13, have been making timely payments to your trustee for at least 12 months, and have the court’s permission.
Why Choose JVM Lending?
Navigating the complexities of obtaining a home loan after bankruptcy can be challenging. At JVM Lending, we specialize in helping clients who are facing bankruptcy or who have filed for bankruptcy protection. Our experienced mortgage lenders understand the nuances of post-bankruptcy home loans and are dedicated to finding the best solutions for your unique situation.
- Personalized Guidance: We offer personalized guidance to help you navigate the mortgage application process, improve your credit, and secure a home loan tailored to your needs.
- Extensive Loan Programs: JVM Lending provides access to a wide range of loan programs, including FHA, VA, USDA, and conventional loans. Whether you’re a first-time homebuyer or looking to refinance, we have options to suit your needs – particularly if have a bankruptcy on your record.
- Commitment to Your Success: We are committed to your success. We work diligently to ensure you receive the best possible terms and support throughout your journey, whether you are refinancing your existing mortgage or trying to purchase a new home.
Your Next Steps
Filing for bankruptcy can be a daunting experience, but it doesn’t have to end your dreams of homeownership or refinancing. By understanding the impact of bankruptcy on your mortgage and taking steps to rebuild your credit, you can position yourself for success in obtaining a home loan after bankruptcy.
If you’re ready to explore your options and take the next step toward homeownership, JVM Lending is here to help.
Contact us today to learn more about how we can assist you in achieving your financial goals.
