Obtaining a mortgage to become a homeowner is exciting but challenging. The home-buying process, however, is more complicated if you have previously filed for bankruptcy.

Filing for bankruptcy can relieve some (or all) of your debt and can stop collection, lawsuits, or repossession. However, you must be ready to pay the price of having such on your credit record, which will make it difficult for you to obtain new loans or credit cards. People who filed for bankruptcy may also have a hard time getting a mortgage.

If you are bankrupt but would eventually want to get a mortgage, note that bankruptcy lowers credit scores. They remain on credit reports for up to ten years, and lenders would check your records with the credit agency.

What to consider

The court order eliminating your debts is called a bankruptcy discharge. Before anything, your bankruptcy should have been discharged before a new lender can even consider your application. Lenders will then check your credit report and creditworthiness. Bankruptcy filing generally has an impact on your application, but the effect would vary for the different types of bankruptcy.

  • Liquidation in Chapter 7

With this bankruptcy type, you sell possessions to pay off unsecured debts, such as credit card debt, personal loans, or medical bills. Before trying to get new credit for a house, prioritize rebuilding your credit history and wait until a few years.

  • Reorganization in Chapter 11

Chapter 11 is a type of bankruptcy for individuals whose income and debts disqualify them from Chapter 7 or 13. A Chapter 11 bankruptcy is expensive, but creditors usually lend you money to purchase a home shortly after it has been discharged.

  • Debt Adjustment in Chapter 13

Under Chapter 13, you repay debts within a repayment period (three or five years). After this, some of your debts will be discharged. Before you apply for a mortgage, you must first seek the permission of your bankruptcy trustee, or the one who oversees payments.

Mortgage loans you may look into

House After BankruptcyBankruptcy filers have different types of loans to consider. Some of these are:

  • Federal Housing Administration or FHA Loans

An FHA loan allows for a down payment of up to just 3.5% of the total purchase price. Mortgage insurance that comes with these, however, leads to higher monthly payments. The lender-required waiting periods for these are two years from bankruptcy discharge for Chapter 7, none for Chapter 11, and one year from discharge for Chapter 13.

  • U.S. Department of Agriculture or USDA Loans

A USDA loan is usually for borrowers buying a house in rural areas and whose low monthly income or moderate-income status makes them ineligible for conventional loan options. These are usually no money down and interest rates are low. The waiting requirements are three years from discharge for Chapter 7, none for Chapter 11, and one year from discharge for Chapter 13.

  • Department of Veteran Affairs or VA Loans

A VA loan is for veterans or those currently in the military. Zero down payment is required and private mortgage insurance is charged. The interest rate is also usually low. There is, however, a funding fee. The waiting periods are two years from the discharge date for Chapter 7, none for Chapter 11, and one year from discharge for Chapter 13.

  • Conventional Loans

As these home loans are not insured or guaranteed, requirements (such as a good credit score) tend to be stricter. If your down payment is less than 20% of the home price, private mortgage insurance must also be paid by the one borrowing. The waiting periods set by private lenders are four years from discharge for either Chapter 7 or 11 and two years from discharge or four years from dismissal for Chapter 13.

Tips for getting approved

Before worrying about a mortgage payment or property taxes, you must first secure a home loan. Homebuyers can choose from several loan types, but make sure you prioritize rebuilding your credit. Below are tips you should follow:

  • Create a budget

Calculating expenditures vis-à-vis income, savings, and your debt payoff goals can help manage your spending.

  • Pay bills on time

Making regular, on-time payments help rebuild your credit. Automated payments could prevent you from paying late.

  • Get a secured credit card

As long as your bills are paid in full and on-time every month, such a card could help your credit. Ensuring that your credit card company reports to the credit bureaus show that you are now a responsible borrower.

Homeownership is something people look forward to. Taking out a mortgage, however, especially after you filed for bankruptcy, is no easy task. Rebuild credit and budget finances for mortgage payments, fees, and taxes before you file the necessary paperwork. More importantly, make sure you get the services of legal experts. Contact us at Phoenix Fresh Start Bankruptcy Attorneys for a consultation.