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What to Know About Mortgages After Bankruptcy

On Behalf of | Oct 14, 2020 | Bankruptcy

Bankruptcy gives consumers a way out of debt, so they can get a fresh start. However, filing for bankruptcy in Waco, TX has an impact on credit, which could make getting mortgages more difficult. It is still possible to increase the chance of getting a mortgage after bankruptcy.

Why Getting a Mortgage Become Harder After Bankruptcy

Two common types of bankruptcy include Chapter 7 and Chapter 13. Chapter 7 is the most common type of bankruptcy that involves liquidating non-exempt assets. People with limited income commonly get approved to file Chapter 7 bankruptcy.

Chapter 13 bankruptcy, commonly referred to as “reorganization”, is for filers who want to repay their debt with a court-approved plan. These filers often have higher income and don’t qualify for Chapter 7. Chapter 13 bankruptcy commonly takes three to five years to clear.

The reason bankruptcy impacts credit is they stay on the credit report for seven to 10 years. When a mortgage lender runs the report, they will see the record of debt trouble as a red flag.

When Will A Borrower Qualify For a Mortgage After Bankruptcy?

A debtor also cannot apply for mortgage until a time period has passed. VA and FHA loans have a waiting period of two years starting on the date of filing. After Chapter 7, a debtor has to wait three years to apply for a USDA loan and four years to apply for a standard mortgage.

The debtor only has to wait a year after Chapter 13 to apply for a USDA, FHA, or VA loan. A conventional mortgage requires the borrower to wait two to four years. The reason Chapter 13 has shorter wait times is that the debtor has been making an effort to improve credit.

A mortgage is not impossible after bankruptcy with the right timing, but the laws are complex. If a debtor sees no other way out of debt, a bankruptcy attorney may be able to help with the case.