Whether it ‘s a personal or business bankruptcy, it can affect your eligibility for a mortgage . Your credit score may drop, and you may have to wait before applying for a home loan. It all depends on the amount of the down payment and the interest you can afford. If you file for bankruptcy, here’s what you need to know:
Type of bankruptcy
There are three common types of bankruptcy: Chapter 7, Chapter 11, and Chapter 13. Chapters 7 and 13 deal with personal debt, and Chapter 11 deals with business debt. Under Chapter 7, most of your assets will be liquidated and the proceeds will be paid to your creditors. You’ll then be free of dischargeable debt and can make a fresh start with your finances. Under Chapter 13, you’ll work out a debt repayment plan with the court that will allow you to keep certain assets, such as your home , while making payments. You’ll pay off your debt within three to five years. In a Chapter 11 bankruptcy, your business’s debts will be restructured, reduced, forgiven, or a combination of the three. Even if you’re business-related, if you have any business debt in your name, it can hurt your personal credit score.
Waiting periods
Any of these types of bankruptcies can significantly lower your credit score, signaling to mortgage lenders that you may be a higher credit risk. The good news is that the impact of bankruptcy on your credit will lessen over time. Chapter 7 and Chapter 13 bankruptcies will be removed from your credit report after 10 years, and Chapter 11 bankruptcies will be removed from your credit report after 7 years. Fortunately, you don’t have to wait that long to qualify for a mortgage .
The minimum waiting period depends on the type of loan you want. For a traditional conforming loan, you can apply within four years of a Chapter 7 or Chapter 13 bankruptcy, or within two years of a Chapter 11 bankruptcy discharge.
The minimum waiting period for government-guaranteed loans is even shorter. For an FHA, VA, or USDA loan, a bankrupt individual only has to wait 2 years to apply, and a bankrupt business only has to wait one year.
It is important to know that if your bankruptcy was the result of a foreclosure, the waiting period may be longer because lenders will be wary of lending to people who have previously defaulted on their mortgages.
Should you wait longer?
Of course, if you apply for a mortgage after the minimum waiting period, you’ll likely be offered higher interest rates and possibly even asked to make larger down payments than if you waited longer. Interest rates that are even a point higher can end up costing you tens of thousands of dollars in interest over the life of the loan. If you wait at least four years and build your credit score by making timely payments on all of your accounts, you’ll prove yourself a better investment and be rewarded with more acceptable loan terms.
New mortgage programs are added every week.
Don’t let the above information discourage you from achieving the American dream of homeownership; new mortgage programs are coming onto the market every week . At Finance USA Corporation, it’s our job to stay ahead of the market and learn about new loan programs. So, if you’ve been through bankruptcy and want to know what home financing options are available to you, pick up the phone and call us today at 703-941-4022. We’d be happy to take the time to answer all of your questions.
You may qualify for a new VA home loan after filing for Chapter 7 bankruptcy. If you want to get a VA loan after bankruptcy, you will need to meet the following requirements: You must wait at least 2 years after the debt is discharged.
