Filing for bankruptcy is typically the action of last resort. Consumers who find themselves in dire financial straits without seeing any way out of their current circumstances are forced to file for bankruptcy in order to protect their assets. Yet a bankruptcy doesn’t keep someone from qualifying for a mortgage later on down the road. Lenders understand that bad things can happen to good people and they’re not going to be punished for seven to 10 years. In fact, lenders allow for a new home loan after a bankruptcy filing in as little as one year after the discharge date in some cases. But when a mortgage is included as part of the bankruptcy which will ultimately end up in foreclosure, different rules apply. And, different rules apply depending upon the type of financing being sought.
For example, consider the FHA home loan program. When the mortgage is not included in the bankruptcy filing, borrowers must wait at least two years from the discharge date of a Chapter 7. Or, in the instance of FHA’s Back to Work program, as little as one year. But neither of these make allowances when the mortgage is included as part of the filing. When the mortgage is part of the bankruptcy the waiting period is calculated a bit differently. When a mortgage is included in a bankruptcy filing the home will eventually go into foreclosure. With an FHA loan, the waiting period in this instance is three years from the recording of the foreclosure.
For conventional loans, if a loan is underwritten to Fannie Mae standards, the waiting period if the mortgage was included in the bankruptcy, while the waiting period is four years from the discharge date the waiting period begins at the date of the discharge and not the foreclosure date.
But take note with either an FHA loan or Fannie Mae loan, it is absolutely critical that someone reestablish credit during the waiting period. This means opening up new credit lines and making timely payments. How can someone obtain credit after a bankruptcy? There are credit card companies that specialize in helping consumers who have had credit problems in the past, including a bankruptcy, reestablish credit. Such accounts will carry higher interest rates and limited credit lines and typically ask for a deposit before opening up a new account. Automobile loans can also be obtained for those with credit issues. And most important? Timely rental payments are a must. The lender will contact the landlord and ask for a completed Verification of Rent form as well as asking the borrowers to provide copies of canceled checks, front and back, showing the date the check was written and when it was deposited.
A bankruptcy is generally the result of an isolated incident out of the borrower’s control and if the lender can reasonably determine it was a one-time event and not likely to reoccur, can indeed qualify for a mortgage at some point in the future.