subject: The Affects A Bankruptcy Has On Mortgage Approvals [print this page] When it comes to getting approved for a mortgage, a bankruptcy can play a major role in your ability to get approved. There are several factors that a bankruptcy has on the home loan process. Knowing what to expect can help you increase your chances for a mortgage approval.
The Waiting Period
If a person has filed bankruptcy, it will be more difficult to get approved for a mortgage loan. Many home loan programs will require a waiting period from the time the bankruptcy has been discharged before the mortgage 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 home loan can be approved. The two year waiting period is based on a FHA home loan. A conventional 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 finance a house while still in chapter 13 bankruptcy. FHA mortgage programs will consider the filing date when calculating the waiting period. A chapter 13 bankruptcy client can get approved for a mortgage after one year from filing the bankruptcy. Since many people 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 mortgage loan. Without the trustee approval, you will not get approved for the mortgage loan.
All mortgage approvals with clients still in chapter 13 bankruptcy require manual underwriting and must follow the FHA mortgage guidelines.
Reestablishing Credit
For most people that file bankruptcy, the toughest step in getting a loan approved is that many loan companies require that the client has reestablished a good credit history since the bankruptcy. The reestablish credit history must also show no new negative accounts since the bankruptcy. For example, if you have a bankruptcy that was discharged in 2007 and in 2008, your car was repossessed, then you will not get approved for a home loan.
Reestablishing credit history usually consists of at least an auto loan and a credit card account. Make sure to keep your revolving 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 loans and conventional home loans that have different guidelines when considering a bankruptcy. These types of mortgage loans are considered non-traditional mortgage loans and many of these programs require a larger down payment. Home loan rates on these programs are also usually 2 to 3 percent higher than a normal conventional home loan.
Avoid New Derogatory Credit
The most important thing to remember after a bankruptcy is to reestablish credit and do not have any new derogatory accounts since the bankruptcy was filed. You want to show the mortgage company that the bankruptcy was an once in a lifetime event and will not happen again. If the lender 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 important to make sure that you are doing everything necessary to have good credit, especially if you want to buy and finance a new property.
