A bankruptcy sign on the road to home ownership.

Mortgage Loans, Post Bankruptcy

Going through a bankruptcy is not a pleasant matter and it might seem like the end of your financial world, but it is not. If you have recently been forced to file bankruptcy, take a moment and breath easy because of the financial relief. When you are done, let’s look at how we can get you into a home.

Believe it or not, bankruptcy is not the end of your dream of home ownership. You can still get a home, but you might have to wait a bit longer. Take a look at the most common types of home loans and see what it is going to take to get you qualified.

FHA Loan

One of the most common loan types is an FHA loan. This government backed loan will be one of the easiest options after a bankruptcy, but there is a waiting period.

If you filed chapter 13 bankruptcy, you will need to wait a year and make 12 months of on time payments. You will also be required to get the approval of your bankruptcy court. For those of you who have filed chapter 7 bankruptcy, the wait will be 2 years before taking advantage of the FHA loan program.

Other Requirements

After your waiting period has passed, you will still have to meet all of the regular requirements of an FHA loan. This means that you will need to have at least 3.5 percent down if your credit score is above 580. If your score is below 580 but above 500, you can still qualify, but you will need to put 10 percent down.

Benefits To FHA Loans

The benefit of an FHA loan is that you can qualify with as little as 3.5 percent down on your home. On a 300,000 dollar home, that is just over 10,000 dollars. This loan program also has relatively low credit score requirement compared to conventional lending. Post bankruptcy, this can be an advantage as you struggle to get your score up.

Negatives of FHA Loans

Now for the not so good facts about the FHA loan program. The biggest disadvantage is the mortgage insurance which can add hundred of dollars to your monthly mortgage payment. Even worse is the fact that for most, the only way to remove this mortgage insurance is to refinance. Gone are the days when it would simply drop off as soon as you reached 20 percent equity.

The only other way to get your mortgage insurance dropped is to put down at least 10 percent. That large of a payment can be difficult for someone post bankruptcy however and, even if you can come up with this down payment, you will still have to pay insurance for 11 years. In today’s market, you will have reached 20 percent equity long before this date.

USDA Loan

The USDA loan is another great option if you want to get into a home after bankruptcy. Just like with FHA, the waiting period is 12 months after a chapter 13 bankruptcy, but the wait is longer for a chapter 7 bankruptcy. After chapter 7 you will need to wait 3 years to apply through the USDA program.

Other Requirements

Once you have “waited it out” you will need to meet the other requirements for a USDA loan. Although officially the program does not have a minimum credit score, lenders will generally require your score to be at least 640, making it a bit tougher to qualify for than an FHA loan. In addition, there is an income limit and the home must be located in a rural area.

Benefits of USDA

The biggest benefit of a USDA loan is the fact that you can qualify with zero percent down. In addition, although there is mortgage insurance, it is cheaper than what FHA charges.

Negatives of USDA

Your home being in a rural area will be the chief disadvantage of a USDA loan, although rural is not what you might think it has to be. Many rural areas are actually located close to cities, so you will not be out in the middle of farmland. With a USDA loan, you also have to deal with an income limit. Your income will have to be a certain percentage of the median income for where you intend to live.

VA Loan

Like the other programs, there will also be a waiting period to qualify for a VA loan. The waiting period is 12 months for a chapter 13 bankruptcy and 2 years for a chapter 7 bankruptcy. Then, the standard requirements apply.

Other Requirements

Obviously, you must be active duty military or a veteran to qualify for a loan. If you have a spouse who died in the line of duty, you may also qualify. Additionally, you need to have a credit score of at least 620. This is not specified by the VA, but it is considered the standard for getting approved by a lender. Lenders in the program get to set their own loan requirements.

Benefits of VA Loan

The biggest benefit of a VA loan is the fact that you can qualify with zero down. Even better, there are no location limitations like the ones you would face with a USDA rural loan and there is no requirement for property insurance. In short, if you qualify for a VA loan, you should probably take it.

Negatives of VA Loan

The only big disadvantage to the VA loan is the loan fee of 1 to 3 percent and the time involved to close. VA loans will generally take a few weeks longer to close than other types of lending.

Conventional Financing

So, what about conventional financing, is it available? Sure, but it will be much harder. In addition to all of the other requirements, you will have to wait at least 4 years before you try to go the conventional route.

Other Requirements

Conventional home loan funding is riskier for lenders because these loans are not insured by the government. For this reason, qualifications will be tighter. You will need a credit score of at least 620, a low debt to income ratio and at least a 3 percent down payment. If you want no PMI, you will need to bump that down payment up to 20 percent.

Benefits of a Conventional Loan

The benefit to a conventional loan is that there are more loan programs available to you with some of the best interest rates. These loans also close faster, without the need for a separate government agency approval.

Negatives of a Conventional Loan

For those recovering from bankruptcy, the disadvantages to a conventional loan are many. The 4 year waiting period may be hard to handle, as will the 20 percent down payment that is needed to avoid PMI.

Rebuilding Credit After A Bankruptcy

No matter which program you ultimately go with, you will need a minimum credit score to qualify for a home loan. This means that after bankruptcy, you will need to do some work to get that score back up. Here are someways to do that.

Make On Time Bill Payments

This is the chief factor in your credit score and something that you will probably have to work on, post bankruptcy. All that you need to do is start making your payments on time and your credit score from this category will improve. If you do this immediately, by the time your waiting period is over, your score will likely have rebounded.

To make sure that your on time bill payment history improves, take advantage of every tool at your disposal. Sign up for bill reminders via email or text and put as many accounts as you can on auto-pay.

Rebuild Your Revolving Credit

When you come out of bankruptcy, you will have probably lost all of your credit accounts. Even if you have a zero balance credit card account that was not included in your bankruptcy, the creditor will almost always close your account once the bankruptcy reports.

What this all means is that you will need to start from scratch. Sign up for a secured credit card or apply with a high risk credit card company such as one from Credit One. Then, use your credit responsibly and make your payments on time. Within 6 months time, you should start seeing improvements in your credit score and may even be able to apply for a more mainstream card.

Limit Credit Usage

As soon as you get that score in shape, you will want to begin limiting your credit usage in preparation for a mortgage. Lenders like stability and you can show this by not applying for any new credit before you apply for a mortgage. Try to put yourself on a new credit freeze at least 3 months before you intend to apply for a loan, but longer is better.

Keep in mind that a new inquiry, although not a major ding to your score, will continue to decrease your total rating for 12 months. Now is not the time to go run out and finance a zero turn mower for your home or anything else for that matter. You will have plenty of time to splurge once you are in a home.

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