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Mortgage After Chapter 12 Bankruptcy
Any loan officers know the agency guidelines on mortgage after Chapter 12 Bankruptcy? What type of mortgage loan can you qualify for purchase or refinance after Chapter 12 Bankruptcy discharge? Is there a waiting period to qualify for a mortgage after Chapter 12 Bankruptcy? What are the HUD, VA, USDA, and FNMA guidelines after Chapter 12 Bankruptcy?
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2 Replies
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Every kind of mortgage loan has different rules for people who have filed a Chapter 12 bankruptcy. So, let’s go over the options and waiting periods for each major loan type.
FHA Loans (HUD Guidelines):
Waiting Period: Usually one year from the discharge date.
Requirements: Must have established good credit or chosen to avoid incurring new credit obligations.
The bankruptcy must have been caused by extenuating circumstances beyond the borrower’s control.
The borrower must have shown an ability to manage their financial affairs.
VA Loans:
Waiting Period: Generally one year from the discharge date.
Requirements:
The borrower must have reestablished satisfactory credit
Financial mismanagement cannot be blamed for causing the bankruptcy.
USDA Loans:
Waiting Period: Typically one year from the discharge date.
Requirements: The borrower must have restored their good credit.
Any adverse credit issues should be explained and documented.
Conventional Loans (FNMA – Fannie Mae Guidelines):
Waiting Period: Normally two years from the discharge date.
Requirements:
- Credit must be reestablished and meet minimum score requirements.
- The waiting period may shrink to 12 months if extenuating circumstances can be supported.
Freddie Mac: Waiting Period:
- Usually, two years from the discharge date. Similar requirements to Fannie Mae.
Additional Considerations:
Credit Score: Although each loan type requires a different minimum score, higher scores can give you better chances at approval and more favorable terms.
Extenuating Circumstances: Many lenders may reduce waiting periods if your bankruptcy was a result of extenuating circumstances, such as severe illness or closure due to an employer shutting down the business.
Reestablished Credit: You will need records showing a good payment history since filing for bankruptcy.
Down Payment/Equity: A larger down payment on purchases or more equity in refinances can improve approvals.
Debt-to-Income Ratio: Must meet specific program requirements.
Documentation: You should expect to provide thorough documentation regarding your bankruptcy case, such as discharge papers, and may be asked for a written explanation.
Chapter 12 Specifics: Some lenders might have additional considerations related to farm income or operations since Chapter 12 is designed specifically for family farmers/fishermen.
Manual Underwriting: Due to the complex nature of post-bankruptcy situations, many loans will require manual underwriting instead of automated approvals.
Occupancy: Primary residences, second homes, and investment properties may have different guidelines.
Loan Purpose:
- There may be different things to consider regarding purchases versus refinances, especially cash-out refinances.
- It is important to remember that while these are general guidelines, individual lenders may have overlays (additional requirements) on top of these base guidelines.
- Working with a knowledgeable mortgage professional with experience dealing with borrowers after bankruptcy can help you find the right fit for your situation.
Also, remember that rules change over time, so always check with specific lenders or an informed mortgage broker about the current situation.
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Mortgage Loans After Chapter 12 Bankruptcy Discharge
Securing a mortgage loan after your bankruptcy discharge could be difficult, but it can be done through different loan programs. Each program has its waiting period and eligibility requirements.
Waiting Periods and Guidelines
Federal Housing Administration (FHA) Loans
Wait time: In most cases, two years after Chapter 12 bankruptcy has been discharged is required before being eligible for this type of loan.
Qualification criteria:
- 580 minimum credit score (with a 3.5% down payment) or 500-579 (with a 10% down payment).
- Evidence that the applicant receives a steady income from employment.
- The borrower must have good credit again or have not taken any new credits since their last discharge.
Notes: Applicants should meet general FHA loan requirements, including mortgage insurance.
Department of Veterans Affairs (VA) Loans
Wait Time: Two years must elapse following the discharge date of your bankruptcy under Chapter 12 filings before becoming eligible for VA loans.
Eligibility criteria:
- Veterans who qualify by service length, active duty members, or surviving spouses may apply.
- However, other family members are not allowed to do so unless stated otherwise.
- Some lenders may request higher credit scores, like around 620 minimum, while others accept lower ones.
The veteran shall earn an income not below what the VA considers sufficient for meeting basic needs after paying debts each month based on where he/she resides, among many other factors, which include residual incomes, etcetera…
Notes: No down payment and no PMI for VA loans are required.
United States Department of Agriculture (USDA) Loans
Wait time: Three years after your Chapter Twelve bankruptcies were discharged, you will become eligible for USDA loans in most cases.
Qualifying prerequisites:
Property must be in an area designated by USDA as rural.
Income eligibility standards have to be met because they only allow low-to-moderate incomes.
Some lenders require at least a 640 minimum credit score, while others accept lower ones.
Notes: No down payment is needed; lower mortgage insurance is insurance at lower rates.
Conventional Loans (Fannie Mae and Freddie Mac)
Wait time: Normally, four years after the date of discharge under Chapter 12 bankruptcy protection should pass before applying for this type of loan.
Eligibility criteria:
- The minimum credit score requirement is 620 or higher, depending on the lender’s discretion.
- The debt-to-income ratio should be, at most, what is considered standard by most conventional lenders.
- Some may be more lenient than others.
- Good credit must have been re-established.
- No new derogatory events have been reported since then.
Notes: In two years, some borrowers could be eligible for conventional loans backed by Fannie Mae or Freddie Mac if they can prove extenuating circumstances such as job loss or serious illness.
Summary of Key Points
FHA Loans are good for people with lower credit scores. The waiting period is flexible (only two years).
VA Loans: Designed specifically for veterans, no private mortgage insurance requirement (PMI) if you don’t pay a down payment; two-year wait time.
USDA Loans: No down payment is required, and they are a good option if your property is in an eligible rural area. There is a three-year wait time only.
Conventional Loans: You must wait for four years before becoming eligible. They typically require higher credit scores than other loan programs, like FHA or VA mortgages, except when there are extenuating circumstances involved.
Additional Tips
Credit Score Improvement:
- Spend the waiting period rebuilding your credit. Pay bills on time, reduce debt, and avoid any new derogatory marks on your record.
- Save Money For Down Payment Purposes.
- Even If Not Necessary.
- Because It Will Still Increase The Chances Of Approval With Better Terms Offered By Lenders Who See This As A Sign Of Financial Stability On Your Part.
Document Everything: Keep accurate records about what happened to your finances during bankruptcy proceedings. Be ready to explain why things went wrong and how they’ve changed since then in case somebody asks you later.