Having to declare bankruptcy can feel like you’ve made a series of financial mistakes you’ll never recover from.
The entire process seems to be surrounded by doom and gloom.
Instead you’re being provided with the opportunity to have a clean financial slate in just a few short years, and the United States is one of the few countries in the world to offer its citizens this facility.
If you were to listen to the average Joe or Josephine they’d have you believe that you’ll never again be able to open a line of credit, including a mortgage, for any reason.
But that’s very far removed from the actual truth because if American citizens who had declared bankruptcy were unable to get mortgages then tens of millions of families would be homeless right now.
Filing for bankruptcy means that your credit score will take a hit, but it’s not permanent. You can quite easily work to restore your credit score immediately after a Chapter 7 discharge or while you’re following your Chapter 13 repayment plan.
When it comes down to it, a mortgage lender needs to know that you’re responsible enough to make your repayments on time and as agreed.
After all, not paying your bills on time is why people wind up filing for bankruptcy in the first place.
Your word won’t be enough, but demonstrating that you’re paying your bills on time every month, have put some savings aside, and not incurred any additional unsecured debts are all ways to prove that you’re a financially responsible person.
All of which are reflected in your credit score. If you’re not sure what your credit/FICO score is right now, then we’d recommend investing in a credit report.
With that said, there are still certain hurdles you’ll face depending on what type of bankruptcy you filed for, and what financial body is being asked to guarantee your mortgage.
Chapter 7
A typical personal or residential mortgage can be guaranteed by the FHA (Federal Housing Administration), Fannie Mae, Freddie Mac, or Ginnie Mae (Government National Mortgage Association).
If your guarantor is the FHA then you’ll be required to wait at least two years after your Chapter 7 discharge before they\’ll be willing to back your loan application.
The actual lenders themselves (i.e. your bank) often ask that applicants wait for two years after their bankruptcy discharge before applying for a loan.
If, on the other hand, your loan guarantor is Fannie, Freddie or Ginnie, then your waiting period is 4 years from the date of your debt discharge.
Chapter 13
Most people assume that they have to complete their bankruptcy repayment schedule over 3 – 5 years before applying for a mortgage.
The truth is that you don’t – you can apply for an FHA-backed mortgage once you’ve successfully made payments according to your schedule for 12 consecutive months.
If, however, you’re asking Fannie, Freddie or Ginnie to guarantee your mortgage, they ask that you wait at least two years after your bankruptcy repayment schedule has been completed.
So the worst possible outcome here is that you will have to wait no more than four years from the date of your Chapter 7 discharge or completion of your Chapter 13 repayment plan before applying for a mortgage again.
But you will need to put in the work to improve your credit score and credit worthiness if you want your application to be successful.