Now, let’s take a look at the specific steps you’ll follow when you apply for your loan.
Step 1: Repair Your Credit
A bankruptcy on your credit report lowers your credit score. If your score is 580 points or lower, you’ll need to take some time to repair your credit so you can meet your mortgage lender’s minimum credit score requirements.
Here are some basic steps you can take to begin rebuilding your credit:
Re-Establish Your Credit
One way to get started re-establishing your credit after Chapter 7 or 13 bankruptcy is to get a secured credit card. When you open a secured credit card, you put a deposit down with your credit card company.
This deposit becomes your line of credit. From there, you make payments on your account and pay off your debt each month. You can get a secured credit card with a low credit score, even after a bankruptcy.
Pay Down Your Debt
Focus any extra cash you have toward paying down debt after your bankruptcy closes. This shows creditors that you’re serious about making a change in your financial situation and raising your credit score over time. Lower levels of debt can also help you qualify for a mortgage.
Pay All Your Bills On Time
The most important thing to do to raise your credit score is to make your credit card and loan payments on schedule each month. Consider signing up for auto-pay if you have trouble managing your payment due dates. Most credit card and loan companies have an auto-pay feature that automatically deducts your minimum payment on the day it’s due.
Step 2: Write A Bankruptcy Explanation Letter
Every time a lender issues a mortgage, they assume a risk. So when you apply for a loan, your lender will take a careful look at your finances to be sure you’ll make your mortgage payments on time every month.
Of course, a bankruptcy on your financial record is a major red flag. You can increase your chances of getting a mortgage after bankruptcy by writing a letter of explanation. A letter of explanation tells your lender more details about your bankruptcy and why you needed to declare bankruptcy.
Include details on the circ*mstances that led to your filing and how your financial life has changed since then. Also, you’ll want to explain the steps you’ve taken to prevent a future bankruptcy as well – like paying off debt and building an emergency fund.
A letter of explanation isn’t always a requirement to get a mortgage after bankruptcy, but it can help your lender see the bigger picture instead of just a set of numbers. Include your explanation letter with your mortgage application when you request a preapproval.
Step 3: Get Preapproved
Once you’ve gone through your waiting period and your finances are in order, it’s time to apply for a mortgage preapproval. A preapproval is a letter from a lender that tells you about how much money you can get in a mortgage loan. Getting preapproved is important for a couple reasons:
First, a preapproval letter lets you know which homes are in your budget and allows you to narrow your property search.
Second, a preapproval tells real estate agents and sellers that you’re more likely to be able to secure the funding you need to buy the home you want to make an offer on. This can be an especially important consideration after a bankruptcy.
Provide Financial Documentation
Your lender will ask you for some financial documentation when you apply for a preapproval. You can get preapproved faster if you already have your documents in order before you apply. Some documents that your lender will likely ask for include your most recent:
W-2s
Bank statements
Pay stubs
Keep in mind that preapproval and prequalification aren’t the same. Prequalifications usually don’t require asset verification. This means that they often hold less weight than a preapproval. Make sure you get preapproved – not prequalified.
Step 4: Respond To Lender Inquiries
Once you submit your mortgage application, the rest is in your lender’s hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If meet the lender’s requirements based on these factors, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.
Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lender’s inquiries quickly to improve your chances of approval.
Depending on whether you filed Chapter 7 or Chapter 13, it'll take two or four years to qualify for a conventional mortgage, one or two years for FHA or VA loans, and one or three years for USDA loan.
Depending on whether you filed Chapter 7 or Chapter 13, it'll take two or four years to qualify for a conventional mortgage, one or two years for FHA or VA loans, and one or three years for USDA loan.
There is a two-year waiting period for an FHA loan application after you receive a Chapter 7 bankruptcy discharge. The two-year clock begins counting down on your discharge date. Use the next two years to improve your credit score, avoid late payments, save up extra cash, and improve your credit profile overall.
That's the point the court released you from your debts, not the time you filed. A Chapter 7 discharge usually takes 6-8 months after filing. USDA loans require a three-year waiting period and conventional loans require a four-year waiting period.
The first essential thing you should do when your bankruptcy has been finalized is plan to start rebuilding your credit. This involves examining ways to avoid and eliminate credit card debt and making sure to pay all your bills on time.
A good credit score to buy a house is one that helps you secure the best mortgage rate and loan terms for the mortgage you're applying for. You'll typically need a credit score of 620 to finance a home purchase. However, some lenders may offer mortgage loans to borrowers with scores as low as 500.
Lenders generally require a waiting period of between one and five years from discharge or dismissal — and up to seven following foreclosure — before they'll approve you for a home equity loan. This is because they want to be sure you've righted your finances and can manage new debt.
How soon can I buy a house after Chapter 7 discharge? Most home buyers have to wait at least 2-4 years after Chapter 7 discharge before they can get approved for a home loan. It may be possible to qualify sooner if you were forced into bankruptcy for reasons beyond your control, but early approval is rare.
Declaring bankruptcy can affect your creditworthiness for several years, making it harder to qualify for a personal loan or get a loan with favorable terms. If you do need to borrow money after bankruptcy, you may be able to get a secured loan (which requires collateral).
You can refinance your home after a Chapter 7 bankruptcy between 2 – 4 years after discharge. It's important to understand the difference between your filing date and your discharge or dismissal date.
Yes, in many instances, if you file for bankruptcy, you can keep your house. To ensure you won't lose your home in bankruptcy, you'll want to start by determining whether you can protect all of your home equity. Whether you're current on your payments will also play into the bankruptcy chapter you choose.
Normally, a cosigner will have to stay on the mortgage for a minimum of one year. From my experience, normally a cosigner will stay on a mortgage for several years. When the borrower is ready to have the cosigner removed, they contact the lender to then re-qualify without the cosigner.
Additionally, filing for bankruptcy does not necessarily protect the co-signer, but it also may not hurt them in some cases. Depending on the type of bankruptcy filed, a co-signer could be approached by creditors looking for the debt. Chapter 7 is harsher on the borrower and co-signer.
Instead, bankruptcy law sets forth the order that your bankruptcy trustee must pay your debts. Usually, the trustee pays them in this order: secured debts first, followed by priority debts, and then unsecured debts.
Can I get an 800 credit score after bankruptcy? While achieving an 800 credit score following bankruptcy is possible, it will take time and hard work. Above all, it is important to pay your bills on time each month and keep your credit card balances low.
You'll have to wait at least until all your debts have been repaid according to your Chapter 13 schedule, which will be either three or five years. However, bankruptcy can stay on your credit report for up to 10 years, which may make it difficult to get a loan with favorable terms.
Chapter 7 must be dismissed or discharged 4 years prior to application for a conventional loan. In the case of conventional loans with a Chapter 13 bankruptcy, you must wait 4 years from the date of filing and 2 years from the date of discharge before applying for a conventional loan.
There's no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender's requirements on the issues raised above (credit score, DTI, employment and down payment).
Unlike other debts, your mortgage payments will not be discharged after you complete your payment plan. In other words, you'll have to keep paying your mortgage in order to keep your home after you've completed your chapter 13 obligations.
Introduction: My name is Greg O'Connell, I am a delightful, colorful, talented, kind, lively, modern, tender person who loves writing and wants to share my knowledge and understanding with you.
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