This is one of the most common questions I am asked. In order to answer, I need to briefly discuss the two types of bankruptcy cases. The most common type of bankruptcy is chapter 7 which forgives debts like credit cards and medical bills. Chapter 7 runs about 3 months from the date the papers are filed with the court to the date the case is discharged. Chapter 13, on the other hand, is a personal reorganization that requires monthly payments to the court for 3 to 5 years. In chapter 13, the discharge occurs at the completion of the payments. The date of discharge starts the clock to get a mortgage.
The law essentially says that a lender can loan money whenever it chooses, meaning as a potential borrower you need to submit an application and wait for a response. That said, lenders have underwriting criteria used in reviewing loan applications. Underwriting criteria and waiting periods vary and are summarized here.
FHA Loans – The waiting period is two years after discharge of a chapter 7. There is no waiting period after discharge of a chapter 13. The Federal Housing Administration or FHA insures mortgages made by FHA-Approved lenders. The FHA is the largest insurer of residential mortgages in the world and its policies create a ripple effect for all mortgage lenders. These government-backed loans are made by commercial banks and generally offer favorable terms.
Conventional Loans – Generally the waiting period is four years after discharge of a chapter 7 and two years after discharge of a chapter 13. These loans are not backed by the government and are offered by most major banks including Bank of America, Citibank, Wells Fargo and Chase.
VA Loans – The waiting period is two years after discharge of either chapter 7 or chapter 13 but can be reduced with a letter of explanation. The Department of Veterans Affairs or VA insures mortgages for servicemembers, veterans and certain surviving spouses thereby allowing the lender to offer better rates and terms. These government-backed loans are made by commercial banks and generally offer favorable terms.
Upon expiration of the waiting period (above) a lender will either disregard the bankruptcy or severely discount its importance. Expiration of the waiting period alone does not qualify you for a mortgage. After a bankruptcy, you should work to rebuild credit and gain or maintain documented income as well as save a down payment. There are many lenders, and many types of loans so you need to carefully review your options. Complicating matters, some lenders like Bank of America, Wells Fargo and many others are FHA and VA approved but also offer conventional loans. All this may seem overwhelming, and if it does a mortgage broker can help you find the right loan for you.
In summary, with some determination and effort you will be able to qualify for a mortgage after bankruptcy if you wait at least two years and work to rebuild your credit. You can do this!
At the Law Office of Michael Primus we have helped thousands of clients get out of debt, stop wage garnishments, and start fresh through bankruptcy. If you live in Contra Costa, Alameda or Solano counties and have debt problems, contact us for a free in-office consultation. We have offices in Walnut Creek, Antioch, and Hercules.