There are many options if you are face overwhelming financial debt. Filing for bankruptcy may provide a fresh start but can impact your eligibility for getting a mortgage. There are ways to overcome these obstacles, however.
Chapter 7 is the most common bankruptcy and is usually approved for individuals who have limited income to pay off their debts. It involves asset liquidation.
Chapter 13 is a reorganization bankruptcy where the debtor develops a creditor repayment plan that must be approved by a bankruptcy court. This plan usually lasts three to five years and is longer than Chapter 7.
A Chapter 7 bankruptcy can stay on credit reports for up to 10 years while Chapter 13 may remain for up to seven years. These reports can negatively impact mortgage applications.
There may be a longer waiting for borrowers for mortgage eligibility after filing for bankruptcy. Approval may still face obstacles or higher interest rates.
However, borrowers are eligible for mortgages a few years after the Chapter 7 debt is discharged. The waiting period is two years for FHA and VA mortgages, three years for USDA mortgages and four years for conventional mortgages.
There are limited-availability programs that allow Chapter 7 filers to qualify for FHA financing within a year if they can show that their debts or financial issues were caused by extreme and uncontrollable circumstances such as divorce.
Chapter 13 periods are usually shorter. Debtors may qualify for a mortgage if they can show that they made 12 months of on-time payments and receive court approval.
Dealing with bankruptcy
When applying for a post-bankruptcy mortgage, you should review credit reports and make sure that all debts paid off with zero balances. Close accounts and try not to apply for and take on new debt.
If you can, save money because a larger down payment can mean lower interest rates. Be prepared to show paperwork on bankruptcy discharge and schedules, recent pay stubs, tax returns for two years and other documents that lenders want to review. Smaller lenders may be more willing to work with borrowers who underwent bankruptcy.
There are many options to deal with debt. An attorney can address your situation and protect your rights.