How A Bankruptcy Plays A Role In Home Loan Approvals | Mortgage

How A Bankruptcy Plays A Role In Home Loan Approvals

When it comes to getting qualified for a mortgage loan, a bankruptcy can play a major role in your ability to get approved. There are many factors that a bankruptcy has on the mortgage loan process. Knowing what to expect can help you improve your chances for a home loan approval.

by DavidWhite

When it comes to getting approved for a home loan, a bankruptcy can play a crucial role in your ability to get approved. There are many factors that a bankruptcy has on the home loan process. Knowing what to expect can help you increase your chances for a home loan approval.

The Waiting Period

If you have filed bankruptcy, it will be more difficult to get approved for a mortgage loan. Many loan programs will require a waiting period from the time the bankruptcy has been discharged before the home loan can be approved. Depending on what type of bankruptcy that you filed will depend on how long the waiting period will be. If you filed a chapter 7 bankruptcy, then you will have to wait at least two years from the discharge date before the mortgage loan can be approved. The two year waiting period is based on a FHA home loan. A conventional mortgage loan will require a four year waiting period.

If you have filed a chapter 13 bankruptcy, the waiting period is still the same on a conventional home loan, but on a FHA home loan, there is a way to buy a property while still in chapter 13 bankruptcy. FHA loan programs will consider the filing date when calculating the waiting period. A chapter 13 bankruptcy client can qualify for a mortgage after one year from filing the bankruptcy. Since many customers are still in chapter 13 bankruptcy after one year, you must get approval from the trustee of your case, that you can add a new debt like a home mortgage loan. Without the trustee approval, you will not get approved for the loan.

All home loan approvals with customers still in chapter 13 bankruptcy require manual underwriting and must follow the FHA mortgage guidelines.

Reestablishing Positive Credit

For most clients that file bankruptcy, the hardest step in getting a home loan approved is that many mortgage companies require that the customer has reestablished a positive credit history since the bankruptcy. Reestablishing credit history must also show no new derogatory accounts since the bankruptcy. For example, if you have a bankruptcy that was discharged in 2009 and in 2010, your car was repossessed, then you will not qualify for a mortgage.

Reestablishing new credit history usually consists of at least a car loan and a credit card account. Make sure to keep your credit card account balance below 10% of the actual credit limit. Home loans require the reestablishment of credit for approval.

There are other loan programs besides FHA mortgage loans and conventional mortgages that have different guidelines when considering a bankruptcy. These types of mortgages are considered non-traditional home loans and many of these programs require a large down payment. Home loan rates on these programs are also usually 2 to 3 percent higher than a normal conventional home loan.

Avoid New Negative Credit

The most significant thing to remember after a bankruptcy is to reestablish credit and do not have any new negative accounts since the bankruptcy was filed. You want to show the lender that the bankruptcy was an once in a lifetime event and will not happen again. If the loan company believes that there is a habit of bad credit or the likelihood of filing bankruptcy again, the loan will be turned down.

Bankruptcy is not a loan killer, but if you have filed bankruptcy in the last seven years, it is crucial to make sure that you are doing everything necessary to have positive credit, especially if you want to purchase and finance a new house.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

David White is a Senior Mortgage Advisor who assist his customers with their Home Loans. David specializes in FHA Home Loans which helps customers who have filed bankruptcy in the past. David has over 12 years experience in the finance industry.