Maria Marmion
Sometimes life takes us down a bumpy path, which can leave us in less than ideal situations like bankruptcy or foreclosure. That was the unfortunate case so many people found themselves in during the housing crisis nearly 10 years ago. But now, with more emphasis on licensing mortgage bankers, increasing ethical standards and laws, and a better job market, the future looks brighter. That’s not to say many people aren’t still impacted by the crash.
If you’re someone who went through bankruptcy and/or foreclosure during the housing crisis, you might think you can’t get another home loan. But before you settle for renting, consider this: It’s possible to qualify for a mortgage even after bankruptcy or foreclosure. The future really does look brighter now, doesn’t it?
HOW DO BANKRUPTCIES AND FORECLOSURES HAPPEN?
Often times, it’s longterm unemployment that can result in a foreclosure. Foreclosures are a result of not being able to pay your mortgage. Basically, if you miss a payment deadline, your lender can take your home to take care of the debt. During this process, lenders will notify credit bureaus, which will likely harm your credit. The thing is, lenders don’t like foreclosures. It’s actually quite expensive and time consuming for them. So if you think you might miss a payment, it’s better to be proactive and talk to your lender about possible options to avoid foreclosure.
A good way to stay aware of your payment due dates is to check your promissory note, which also includes information on when and how much late fees are.
If you’re unable to pay your mortgage, your lender will take your home to pay off debt through the legal action of foreclosure. They then sell the home, and then whatever is left over is what you’re still required to pay. For example, if you borrowed $250,000 and the foreclosed home sold for $100,000, then you still owe $150,000. This is called a “deficiency on the loan.”
The problem is, other than not having a home, if you don’t have a job, it’s a bit unrealistic to pay off the deficiency. After all, not having a job is what possibly got you here in the first place. So, this leads homeowners to the next step – bankruptcy. In this case, you may file for Chapter 7 bankruptcy, where you include your mortgage and house and liquidate those assets to rid yourself of any debt. Another option is Chapter 13 bankruptcy, which essentially allows you to repay your debt in installments.
Homeowners sometimes file for bankruptcy, often times after the foreclosure has occurred and they can’t pay off the deficiency. But people can file for bankruptcy for different reasons unrelated to homes, and it doesn’t always involve a foreclosure.
Filing for bankruptcy is not ideal, but sometimes its the only solution given certain circumstances, and it can ultimately help you get a fresh start and possibly receive a second chance.
The good news is, although many believe this is the end for them, in reality, it’s still possible to get another home down the road.
WAITING PERIODS FOR LOANS
There are a few different loans you could potentially choose from in the event of post-filing of bankruptcy. The ones that are a bit more forgiving are government-insured loans. Since your credit won’t be stellar, choosing between FHA, VA loan, or USDA could be your best bet, as long as you qualify for one of them.
If you don’t qualify for any government-insured loans, but do for a conventional loan, then the wait time is a bit different. Here are the generalwait times for loans:
FHA
- Chapter 7 bankruptcy: 2 years
- Chapter 13 bankruptcy: At least 1 year of satisfactory payments and court’s approval
- Foreclosure: 3 years
VA loan
- Chapter 7 bankruptcy: 2 years
- Chapter 13 bankruptcy: At least 1 year of satisfactory payments and court’s approval
- Foreclosure: 2 years
USDA
- Chapter 7 bankruptcy: 3 years
- Chapter 13 bankruptcy: At least 1 year of satisfactory payments and court’s approval
- Foreclosure: 3 years
Conventional loan
- Chapter 7 bankruptcy: 4 years
- Chapter 13 bankruptcy: 2 years from discharge date or 4 years from dismissal date
- Foreclosure: 7 years
Also keep in mind guidelines can vary depending on when your foreclosure and bankruptcy were filed and reasons behind the filings. There are some differences between the outcome of the bankruptcy in terms of “dismissal” vs. “discharge,” as well as foreclosure “completion date” vs. “disbursement date.” The completion date is the date the lender foreclosed, and the disbursement date is the date that the lender or bank sold the home to someone else.
REBUILD YOUR CREDIT AND PREPARE FOR THE MORTGAGE APPLICATION
While you wait things out before applying for a mortgage again, a good step forward in the right direction would be to work on rebuilding your credit.
As you are aware from your first purchase, credit scores play a big part in the loan you qualify for. Here are a few things to consider doing:
- Check your credit report first to know where you stand.
- Keep balances low and pay off any balances in a timely manner instead of moving it around.
- Stay current on your payments. The longer you stay current, the more your score should increase with time.
- Set up reminders to help you stay on top of your payments.
- Don’t open up a bunch of credit accounts in a short-period of time, and don’t close unused credit cards, especially in a short period of time. Closing them won’t make them go away.
- Introduce a good mix of different types of credit.
- Consider applying for a credit-builder loan which basically helps you build your credit like a forced savings account. It makes you put money away each month that you’ll get in the end.
- Talk to your mortgage banker for more unique tips that are better tailored to you.
It’s tough to go through bankruptcy and foreclosure, but you’re not alone, and we get it. So just keep in mind it’s possible to turn things around and improve your financial situation with some dedication, research, help from your mortgage banker, and consistency with working on improving your credit. For more home buying tips, visit the Atlantic Bay blog.