Just because someone has a bankruptcy doesn’t mean he or she will never again qualify for a mortgage. Consider the adage, “There is life after a bankruptcy.”
While several types of bankruptcies exist, two of the more common ones are Chapter 7 and Chapter 13. Not only does each have its own ramifications for being eligible for a mortgage, but so does the type of loan being sought.
Take someone who filed a Chapter 7 bankruptcy and wants to purchase a home with an FHA loan. To be eligible, that person typically will have to wait two years from the discharge date, which is the day “the debtor is no longer legally required to pay any debts that are discharged,” according to the Administrative Office of the U.S. Courts.
However, that same person may be eligible for an FHA loan in as little as one year if he or she can prove there were extenuating circumstances.
According to Fannie Mae, “Extenuating circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations.” Documents that prove this include “a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, etc.”
Now imagine that same person wants to get a conventional mortgage instead. This would typically require a four-year waiting period from the discharge or dismissal date, which is the day a court dismisses a bankruptcy.
Once again, though, extenuating circumstances may shorten the waiting period. Unlike FHA requirements, eligibility for conventional loans lessens only to two years instead of one (Below is a table that clarifies the waiting period between FHA and Conventional loans).
Chapter 13 is different from Chapter 7 because it allows the debtor to use “a repayment plan to make installments to creditors over three to five years,” according to U.S. Courts.
To be eligible for an FHA loan after filing Chapter 13, a borrower will have the same 1- to 2-year waiting period as in Chapter 7. But there is a slight difference between the different bankruptcies for a conventional mortgage.
For a conventional loan after filing Chapter 13, according to Fannie Mae, the waiting periods are two years from the discharge date, or four years from the dismissal date.
In most cases, conventional mortgages typically require longer waiting periods after a bankruptcy than government loans (FHA, VA and USDA). Call me at 813-707-6200 if you have questions about this or about VA and USDA eligibility requirements.
|Ch. 7²||Ch. 13²|
|FHA||2 years (1)||2 years (1)|
|Conventional||4 years (2)||4 years(2)|
¹ Numbers in parentheses show years to wait for extenuating circumstances
² Bankruptcies do not include real estate