There are several types of mortgages available in to home buyers after a bankruptcy discharge. After a bankruptcy discharge under Chapter 7 or Chapter 13 you may be able to qualify for a mortgage sooner than you think. When your debt to income ratio is better after discharging some or all debts, you may be a better lending risk when you have more disposable income to save money and pay bills. After your bankruptcy discharge you have some time to work on re-establishing your credit and saving money for down payments and closing costs. When you are ready to start shopping for a mortgage there are several options to consider depending on your personal situation and home ownership goals.
How long will I have to wait?
There are two types of bankruptcy, Chapter 7 (full discharge) and Chapter 13 (partial discharge and reorganization). Many people with Chapter 13 bankruptcies are approved for government-backed mortgages after one year or they could be approved for a conventional mortgage loan after two years. The Chapter 7 bankruptcy filers may have to wait three or four years after their discharge to be approved for a new mortgage.
Some people chose to take at least two years or more to rebuild their credit using secured credit cards and small loans, while also saving cash for the expenses involved in putting money down and closing on a new home. The longer you wait, the better interest rate you may get. This is not always true however because interest rates fluctuate.
Conventional and government-insured loans
The difference between conventional loans and those insured by the U.S. Government is the financial guarantee for the lender, in case the individual fails to pay the mortgage. Conventional loans are not guaranteed by the federal government, and because they are not secured, the buyer must have better finances.
The common government-insured mortgage loans are the FHA loans, VA loans and USDA loans:
- FHA loans backed by the Federal Housing Administration allow participants to make down payments as low as 3.5%. Purchasers will be required to pay for mortgage insurance which increases monthly payments;
- VA loans secured by the U.S. Department of Veterans Affairs help military service members and their families buy homes with 100% financing meaning the purchaser only needs to pay the closing costs.
- USDA loans are insured by the U.S. Department of Agriculture and benefit rural buyers who satisfy income requirements including a steady middle class income who otherwise may not qualify for conventional loans.
Adjustable vs fixed-rate mortgages
If you are approved for a fixed-rate mortgage when interest rates are low you will be locked in at that low mortgage rate for the entire term of the loan and your monthly payment will not change. The other type of loan is an adjustable-rate mortgage loan (ARMs) which have interest rates that change from time to time based on interest rates. Some ARMs provide fixed rates for several years after which time the rate is subject to adjustment based on the rates at the future date. If interest rates are high on mortgages when you are applying, you might want an ARM so that you can try to lock in a better rate when the rates go down. You always have the opportunity to refinance your loan and select a fixed-rate mortgage after having an ARM for some time.
For more information about applying for mortgages after a bankruptcy, please call Joseph Wrobel, Ltd.
About us: Joseph Wrobel, Ltd., works with clients to find out if they qualify for Chapter 7 or 13 bankruptcy, and their options and rights under the law. The firm will also advise and assist clients with questions and concerns about the collectors and their rights to pursue you.
Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start.