Waiting periods: Bankruptcy and foreclosure don't end your mortgage chances
The Great Recession took its toll on many households -- contributing to home foreclosures, bankruptcies and other financial disasters. Ten years after the start of the mortgage crisis, we're looking at a very different picture. And consumers are finding their feet and ready to re-enter the homeownership club, assuming that they can get a mortgage after bankruptcy. But how long does it take to recover from these difficulties and regain mortgage eligibility? It depends on the reason you filed bankruptcy, how you've handled your finances since then, and what mortgage program you choose.
Mortgage after bankruptcy: Chapter 7 waiting periods
Each loan type has its own waiting period guideline after a bankruptcy. Waiting periods for a mortgage after bankruptcy are:
While these are the “standard” guidelines, you may qualify for a conventional or FHA loan even sooner.
Both loan types have exceptions for “extenuating circumstances” or one-time events that caused income loss and that were outside the homeowner’s control.
Waiting periods when a bankruptcy includes home foreclosure
The foreclosure waiting period for a conforming loan is typically seven years. However, when bankruptcy includes your foreclosure, you may qualify for a shorter waiting period. The key here is knowing if your foreclosure occurred before or after your bankruptcy. Different rules apply depending on those dates. You can find the foreclosure "completed date" on your county's website, which records all property sales, foreclosure or otherwise.
The foreclosure occurred before the bankruptcy
Things are simple when the foreclosure happens before the bankruptcy. The waiting period starts at the bankruptcy discharge date. For instance, your lender foreclosed on you in June 2016. Then, you filed for bankruptcy in November, and obtained your discharge in December. The waiting period begins in December 2016. If you wanted a conforming loan, for instance, you would be eligible in December 2020. This assumes the bankruptcy was not caused by an extenuating circumstance, in which case the waiting period would expire in December 2018.
The foreclosure occurred after the bankruptcy
But what happens if the sequence is reversed? In other words, the foreclosure happened after the bankruptcy was discharged, not before? Sometimes, homeowners believe their foreclosure is complete, and include their mortgage deficiency in the bankruptcy. But the foreclosure or “sheriff sale” doesn't take place until later. This is an important point because different loan types view this scenario differently. With FHA, the standard foreclosure seasoning applies, which is three years, regardless of the reason for the foreclosure. Fannie Mae and Freddie Mac may be a better deal if you have extenuating circumstances. They let you go with the standard waiting period for bankruptcy instead of the seven-year wait for foreclosures. But without extenuating circumstances, their standard waiting period is four years, one longer than FHA. It must be clear that the foreclosure and bankruptcy are tied together. Fannie Mae guidelines state:
When both a bankruptcy and foreclosure are disclosed on the loan application, the lender may apply the bankruptcy waiting period if the lender obtains the appropriate documentation to verify that the mortgage loan in question was discharged in the bankruptcy. Otherwise, the greater of the applicable bankruptcy or foreclosure waiting periods must be applied.
Government loan foreclosures can cause additional problems
If you failed to repay a government-backed loan (FHA, VA, USDA, student loan or some tax debts), you may find yourself on a database called CAIVRS, the Credit Alert Verification Reporting System. To get another government-backed loan, the CAIVRS finding must be resolved. Fortunately, with your lender's help, you can appeal the status of your CAIVRS findings. Many who are in the system actually qualify to be taken out; for instance, they defaulted on a student loan but are now in a payment plan. Appealing CAIVRS can take some time. If you have any doubts about your status, resolve it before home shopping. It always makes sense to get mortgage pre-approval before looking for houses anyway.
Tips to quickly rebuild your credit
Re-establishing your credit involves opening credit accounts and paying them on time for at least 12 months. Keep the accounts open and active. Most mortgage programs require that you prove you can manage debt post-bankruptcy, and missing payments or amassing collection accounts does not help your case.
Start with a credit card. Use it for gas, and pay it down every month. Keep a small balance on it so the credit bureaus can see that it’s active, but try to keep it below 30 percent of your available balance. Owing much less than your available balance boosts your credit score. If you have friends or family with excellent credit, ask them to add you as an authorized user to one or more accounts. You never use the credit card -- in fact, you don't even need to know the number or company it's with. But being added as a user allows your loved one's good repayment history to show up on your credit report and help your score. You could also apply for personal loans, student loans, and car loans. The credit bureaus and lenders want to see that you use credit conservatively and responsibly. If there is limited re-established credit, the lender may look for non-traditional credit like 12 months of cell phone bill, gym membership, car insurance, or cable bill. With some planning, you can build your credit score back to the level at which you can qualify for a home purchase.
Source: Gina Pogol