The United States Bankruptcy Code recognizes two categories of personal bankruptcy: Chapter 7 and Chapter 13. Following is a summary of each form of bankruptcy and the required waiting period to qualify for a mortgage.
Chapter 7 is the most prevalent form of bankruptcy in the United States. To qualify for this form of bankruptcy, an individual must pass the """"means test"""". This option permits any creditor to reclaim any collateral used to secure a debt that will be discharged. Additionally, the bankruptcy trustee may liquidate non-exempt assets and distribute the proceeds to unsecured creditors. There are exceptions to the court's ability to discharge debt, including tax judgments, student loans, spousal and child support. There are also state-specific limitations on the amount of property that can be exempted in a bankruptcy. This form of bankruptcy can only be filed once every eight years. Depending on the form of mortgage used, there are varying waiting periods following a bankruptcy. After discharge from a Chapter 7 bankruptcy, the waiting period for a conventional loan is 4 years, 2 years for an FHA or VA loan, and 3 years for a USDA loan.
Chapter 13 is the second most prevalent type of personal bankruptcy. This option allows a person to retain all of their possessions and assets, but they must qualify for and accept a court-determined payment plan to repay their creditors. The quantity of repayment is determined by the individual's income, monthly expenses, property value, and discharged debt. The duration of most repayment programs is typically between 3 and 5 years. Under this form of bankruptcy, monthly payments are made to a trustee who oversees the completion and discharge of the bankruptcy. In this bankruptcy option, unsecured debt and medical expenses are not required to be repaid. Depending on the form of mortgage used, there are varying waiting periods following a bankruptcy. Chapter 13 bankruptcy requires a two-year waiting period for a conventional loan after discharge, whereas FHA, VA, and USDA allow financing after 12 months of on-time payments. Obtaining a mortgage is contingent on court approval if the bankruptcy has not been discharged.
Lenders will scrutinize your post-bankruptcy credit history when you apply for a mortgage following a bankruptcy. Therefore, it is essential to make all payments on time. Reestablishing credit after bankruptcy is one of the most essential factors. You should be actively engaged in credit restoration. Regularly check your credit and credit scores, dispute any inaccurate credit, resolve any negative credit, establish credit with secured credit cards and/or installment loans, and pay your expenses on time. Lenders will require a copy of your bankruptcy schedules and discharge papers, as well as a letter of explanation detailing the cause of the bankruptcy. Lenders will also require that your credit has been reestablished without any negative marks since the discharge. A person should ideally have at least one installment loan and two revolving accounts (credit cards) with at least a 12-month payment history to demonstrate to a lender that they can manage their credit. For revolving credit, it is in your best interest to maintain the balance below 30 percent of the available credit limit; by doing so, your credit scores will be maximized. There are additional factors that lenders will consider when determining your eligibility for a mortgage after bankruptcy. These include the down payment, income, employment history, and stability of income. Please contact a reputable loan officer for further information on mortgage financing after bankruptcy.""
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