How A Bankruptcy Plays A Role In Mortgage Approvals

August 22nd, 2010 | Author: David G White

When it comes to getting qualified for a mortgage loan, a bankruptcy can play an important role in your ability to get approved. There are many factors that a bankruptcy has on the mortgage loan process. Knowing what to expect can help you improve your chances for a home loan approval.

The Waiting Period

If you have filed bankruptcy, it will be more difficult to get approved for a mortgage loan. Many mortgage programs will require a waiting period from the time the bankruptcy has been discharged before the loan can be approved. Depending on what type of bankruptcy that you filed will depend on how long the waiting period will be. If you filed a chapter 7 bankruptcy, then you will have to wait at least two years from the discharge date before the mortgage loan can be approved. The two year waiting period is based on a FHA home loan. A conventional mortgage loan will require a four year waiting period.

If you have filed a chapter 13 bankruptcy, the waiting period is still the same on a conventional home loan, but on a FHA mortgage loan, there is a way to buy a house while still in chapter 13 bankruptcy. FHA loan programs will consider the filing date when calculating the waiting period. A chapter 13 bankruptcy client can qualify for a mortgage after one year from filing the bankruptcy. Since many customers are still in chapter 13 bankruptcy after one year, you must get approval from the trustee of your case, that you can add a new debt like a home loan. Without the trustee approval, you will not get approved for the mortgage.

All home loan approvals with customers still in chapter 13 bankruptcy require manual underwriting and must follow the FHA loan guidelines.

Reestablishing Positive Credit

For most customers that file bankruptcy, the toughest step in getting a home loan approved is that many mortgage companies require that the customer has reestablished a good credit history since the bankruptcy. Reestablishing credit history must also show no new negative accounts since the bankruptcy. For example, if you have a bankruptcy that was discharged in 2008 and in 2009, your car was repossessed, then you will not qualify for a mortgage loan.

Reestablishing credit history usually consists of at least a vehicle loan and a revolving credit account. Make sure to keep your revolving account balance below 10% of the actual credit limit. Home loans require the reestablishment of credit for qualification.

There are other loan programs besides FHA home loans and conventional home loans that have different guidelines when considering a bankruptcy. These types of mortgages are considered non-traditional loans and many of these programs require a larger down payment. Home loan rates on these programs are also usually 2 to 3 percent higher than a normal conventional mortgage.

Avoid New Derogatory Credit

The most significant thing to remember after a bankruptcy is to reestablish credit and do not have any new derogatory accounts since the bankruptcy was filed. You want to show the loan company that the bankruptcy was an once in a lifetime event and will not happen again. If the lender believes that there is a habit of bad credit or the likelihood of filing bankruptcy again, the mortgage loan will be declined.

Bankruptcy is not a mortgage killer, but if you have filed bankruptcy in the last seven years, it is crucial to make sure that you are doing everything necessary to have positive credit, especially if you want to buy and finance a new home.

David White is a Sr. Home Loan Consultant who assist his clients with their Home Loans. David specializes in FHA Home Loans which helps customers who have filed bankruptcy in the past. David has over 12 years experience in the finance industry.

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How A Bankruptcy Plays A Role In Mortgage Approvals

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