How Bankruptcy Affects Your Chances to Get a Mortgage Loan?

mortgage loan

The act of filing bankruptcy is a serious undertaking and a person files it only when the debt becomes difficult to pay. This act helps people get out of some or complete debt and stop collection activities such as lawsuits and repossessions. This becomes possible only if you’re strong enough to keep this mark on your credit for seven to ten years. This will also hurt your ability to get loans and credit cards. Whether you have filed for bankruptcy or are planning to do so, you should know how it will help you and what the consequences will be. Well, it is possible to get a mortgage loan after filing bankruptcy, it would be difficult and quite challenging. The local banks barely give loans to people after a bankruptcy filing. 

How Bankruptcy Affects Your Chances to Get a Mortgage?

The credit agencies usually report the information regarding loan payments on a monthly basis. As such, if the individual pays on time, it will show in their reports. This will help a person get a mortgage. But if the person is not able to manage their finances, then they can always file for bankruptcy and get back on track. After filing for bankruptcy, there is a period of seven-ten years when an Individual will not be able to get any kind of loan or credit card.

The bad credit scores can also make it difficult to get a mortgage in the future. This is not because of the bankruptcy filing itself but if you don’t pay your bills on time or fail to pay off your credit card balance, the lenders will also be reluctant to lend money to you.

Types of Bankruptcy and their effect on the ability to take a mortgage loan.

  1. Chapter 7: Liquidation

It is the simplest of all the bankruptcy plans to carry out. This plan includes the liquidation of all assets such as cars and other valuables. The process involves selling these belongings and applying the money for payment of your creditors. This will help you get a fresh start and also apply for loans in the future.

  1. Chapter 13: Adjustment/Reduction

This is a form of bankruptcy wherein by filing for bankruptcy, you get to pay off some or all of your debts over a period of five to eight years. The payment plan involves a combination of payments and penalties. A lawyer will define the amount that you need to pay off each creditor and work out the plan with them. The creditors will be paid overtime in this plan. The difference is that in this case, the bankruptcy terms are only for a maximum period of five years.

  1. Chapter 11: Reorganization

This bankruptcy is commonly filled by businesses but individuals can also apply for this. A single person can only file this bankruptcy if he/she makes a huge amount of money and qualifies for Chapter 7 and has more debt than the amount allowed in Chapter 13 bankruptcy. You’ll be able to get a mortgage loan only after getting discharged from Chapter 11 bankruptcy.

Types of mortgage loans you can apply for after filing bankruptcy are:

  1. Conventional Mortgages:

These are mortgages that are available in the market and offer a little higher interest rate than other types of loans. A conventional mortgage is obtained from alternative lenders as these loan options are not provided by banks or government agencies. There are several lending institutions that offer this type of mortgage loan. You can easily get it from any reliable lending institution such as Canadian Cash Solutions. You need to keep these waiting periods in your mind before applying for one:

Chapter 11: 4 years from your discharge date

Chapter 7: 4 years from your discharge date

Chapter 13: 2 years from your discharge date or 2 years from your dismissal date

  1. VA Loans

This loan is filed by a veteran or one who is currently serving in the military.  The Department of Veteran Affairs Loans will approve this loan. You do not have to make a down payment and also you’ll not be charged with private mortgage insurance. If you apply for a VA loan, you’ll have to pay a funding fee that will be a percentage of your home. 

To get a VA loan after bankruptcy, the waiting period will be:

  • Chapter 7: 2 years from your discharge date
  • Chapter 11: No waiting period
  • Chapter 13: 1 year from your discharge date
  1. FHA Loans

This is a loan offered by the Federal Housing Administration (FHA). This mortgage insurance covers up to 20% of the home’s value. Therefore, you’ll have to pay private mortgage insurance (PMI) if your FHA loan exceeds 80% or less. The interest rate that you’ll be charged ranges from 2.3% to 3.5%. You will have to make a down payment i.e. 3.5% of your home’s value. Along with this, you’ll also have to pay insurance costs that will make your monthly payments higher. To get a mortgage using an FHA loan, you have to wait for a period that is stated below:

Chapter 7: 2 years from your discharge date

Chapter 13: 1 year from your discharge date

Chapter 11: No waiting period

How To Get Easy Approval For A Mortgage Loan?

Bankruptcy can damage your credit, but that doesn’t mean you can’t get approved for a mortgage loan in the future. With responsible repayment of debts and persistent hard work on improving your credit score, you can get back on the road to homeownership.

Ultimately, getting approved for a mortgage after bankruptcy is a matter of proving that you are now a trustworthy borrower — and the more steps you take now to build up creditworthiness, the better. Here are some useful and proven tips to improve your credit score:

  1. Make a budget: Track your income and expenses carefully, and do not exceed your income. Creating a budget can help you understand where your money is going and how to live within your means.
  2. Pay bills on time: Payments of all types — credit cards, utilities, rent, or mortgage — must be made on time for them to have an impact on your credit score. If you are going to get a mortgage or other credit, it will take at least six months to pay off debts and build a strong history.
  3. Keep your debt low: The fewer accounts you have, the more likely lenders are to approve you for a loan. Credit card balances should not be allowed to exceed 35 percent of your credit limit, and there is little point in having multiple auto loans for several vehicles or multiple installment loans on household items if you have no intention of repaying them.
  4. Apply for credit sparingly: If you need a loan, get it and pay it off in full before applying for another. The more loans and credit cards you have, the fewer lenders will be willing to take a chance on you.

  5. Do not close unused accounts: While closing an account decreases your available credit, it also removes an account that has been used successfully in the past and helps to rebuild your credit history with lenders.

What One Should Do In the Waiting Period After Filing Bankruptcy?

After filing for bankruptcy, one should wait for 90 days to get a formal discharge of debts. This waiting period makes some people think that they can again start getting credit cards immediately. But it is not so. The waiting period just gives creditors time to make a decision on the person who filed bankruptcy. If you have signed up with a payday loan company, it will take 180 days from the day you officially register your bankruptcy case, to close your account with them.

  1. Try to boost your income: After filing for bankruptcy, your current income will be an important factor for the creditors to consider when deciding if they want to give you credit or not. Therefore, you should try to boost your income. There are a lot of ways that can help you increase your income. For example, you can get a second job and work overtime to earn more money. You can also try to get a raise from your employer and even apply for government assistance programs that offer financial aid in your household if needed.
  2. Increase Your Savings: A lot of people apply for credit cards even when they don’t really need to. If you have done the same, you should start saving money in order to strengthen your financial reputation. Credit cards are easy to get, especially if you have previously been approved through a credit check. But when it comes time for creditors to decide whether or not you are worthy of getting new credit, they will take into consideration the amount of debt you owe compared to the amount of months’ worth of savings income that you have. Therefore, you should try to increase your savings and use them occasionally to pay off your credit card bills.
  3. Hire a Professional: You can even have a professional help you with improving your credit score. The good thing is that you can find these professionals for free through the Internet, so do not hesitate to search for personal bankruptcy interview questions online and see if there are any attorneys or accountants who can help you improve your situation.

Now that you have acquired some information about mortgage loans and bankruptcy, you should proceed. You can plan, execute and get back on track with finances. Thus, stay focused on improving your financial situation and you’ll soon get out of bankruptcy or any loan. 


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