In Monopoly, bankruptcy takes you out of the game. That’s not the case in the real world.Although society views bankruptcy with stigma, it can happen to anyone, not just people who spend recklessly. According to a Harvard study, 62.1% of bankruptcies in 2007 were a result of medical bills or illness; two things out of your control.
Chapter 7 and Chapter 13 are two types of bankruptcies most commonly used by consumers. If you follow a few guidelines, you can qualify for an FHA loan after either one.
Chapter 7 bankruptcy dismisses most of your debt to relieve you of the financial burden. It also appears on your credit report and damages your score.
Declaring bankruptcy in the past suggests you may have trouble paying bills in the future. For this reason, some lenders offer high-interest subprime loans to people with adverse credit history (like bankruptcy) to compensate for risk. The FHA loan is an affordable alternative.
FHA loans are insured so you’re able to qualify for a low-interest mortgage. We can offer you an FHA loan with a competitive rate even after bankruptcy because insurance covers the risk.
You can become eligible for an FHA loan two years after filing Chapter 7 bankruptcy. The two-year waiting period is called a “seasoning” period. During that time, you should work on rebuilding your credit by paying your bills on time and keeping your credit utilization below 30%.
The waiting period starts at the time your bankruptcy is discharged and not from the date that you file. You’ll also need to submit a thorough explanation of why you went bankrupt with the application to get approved for an FHA loan.
For Chapter 13 bankruptcy the rules are a little different. Chapter 13 bankruptcy reorganizes your debt into a payment plan. Then, you make payments for all or a portion of your debt.
The time-frame before you can qualify for the FHA loan is shorter for Chapter 13 bankruptcy. You can qualify after 12 months if you make on-time payments toward your debt settlement.
Just like Chapter 7 bankruptcy, you have to submit an explanation for the bankruptcy and meet other FHA requirements to get approved for the loan.
You need credit to build credit; there’s no way around it. After bankruptcy, you’ll have trouble getting approved for a regular credit card, but you should be able to get a secured one.
A secured credit card requires a cash deposit for your credit line. After you “pay as agreed” for a certain period of time, the credit limit increases. Eventually, you’ll get your deposit back as well.
If you feel confident you can manage a secured credit card, make small purchases on it and pay it off entirely each monthly. Your credit score will slowly improve over time and you’ll look like an even better candidate when you’re ready to apply for your next home loan.
Interested in learning more about your mortgage options or prequalifying for a home loan?