Qualifying for a Mortgage After Bankruptcy

Qualifying for a Mortgage After Bankruptcy

 It would be reasonable for an individual to assume that s/he could still qualify for, and get a home mortgage loan approved, after having been forced into bankruptcy (chapter 7 or 13), a legal option made available by our government to citizens and legal residents; because there has always been a sentiment to give a second chance to those who – having slipped and find themselves in an unenviable situation – are deserving of a second chance by the norms of a forgiving society have often been given one.

 Bankruptcy is a process that must be avoided if possible, and should only be thought of as an option when all other options have been explored and exhausted; but in the absence of any other choices, it's a legal remedy available to individuals as well as business entities) for the “re-organization” of their financial affairs.

 That having been said, it is important to keep in mind that bankruptcy laws have undergone changes in the last ten years (2005 to be exact) and, as a result, the process to get a bankruptcy petition approved has become increasingly more arduous. In fact the 2005 law has introduced a process known as “means testing” which, according to an article titled 'The New Bankruptcy Law' published to the Nolo website, “...prohibits some filers with higher incomes from using Chapter 7 bankruptcy.”

 However, once a petition has been accepted and approved by the bankruptcy court, there are two possible outcomes. The first is known as a “dismissal” and the second, a “discharge;” and these are the elements of bankruptcy filing – as they relate to mortgage qualification – that will be discussed further in this article. This and other newly introduced requirements (like credit counseling) proir to a filing being permitted explains why the process has become increasingly difficult, and the time involved has become more prolonged.

 Nevertheless there are mortgage programs which will accept mortgage applications to be processed and approved for home buyers who have a bankruptcy filing reflected on their credit reports. According to FHA (Federal Housing Administration), the mortgage-insurance arm of HUD (Housing and Urban Development) which also administers the residential (1 to 4 family and mixed-use properties), “...a Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage...” provided that the lender requests and receives documents that proves several things.

 HUD's conditions for insuring a mortgage after the mortgage borrower has filed bankruptcy, but prior to discharge are:

1. One year of the pay-out period under the bankruptcy has elapsed,

2. Borrower’s payment performance has been satisfactory and all

   required payments have been made on time, and

3. Borrower has received written permission from bankruptcy court to

   enter into the mortgage transaction.

Let's discuss what is not explicitly stated above. Although there is no mention of a dismissal, condition number 2 on the above list clearly states that the borrower must have made the court-ordered payments in a “satisfactory” manner, and this would automatically rule out a dismissal, an outcome which results from failure to satisfactorily adhere to “all required payments” set by the court. So we now know that qualifying for a mortgage after a bankruptcy that results in a dismissal will not work.

 Following is a quote in the Michele Lerner article titled, 'How to get a mortgage post-bankruptcy' which appeared on the HSH website:

 "If you filed Chapter 7 bankruptcy, which means you discharged all your debt, you are eligible to apply for a mortgage in two years for an FHA or VA loan and in four years for a conventional loan," says Julie Flatland, vice president of credit in the mortgage lending division of Carrington Mortgage Services in Santa Ana, Calif.

 According to this quote as it appears above, it is clear that a prospective buyer who is interested in securing mortgage financing can do so providing that certain conditions are met, and this eligibility is authorized by FHA, VA and Conventional mortgage guidelines. And based on the previously mentioned condition items from the the HUD website, we know also that prospective post-bankruptcy borrowers are also eligible for mortgage financing while still in the process (pre-discharge) of a Chapter 13 bankruptcy. So there are options available to any prospective mortgage borrower even after a bankruptcy filing despite which Chapter s/he had filed.

 Notwithstanding the HUD option of applying for a mortgage while still making payments per the schedule provided by a court-appointed trustee, post-bankruptcy mortgage borrowers must keep in mind that the road back to mortgage qualification and approval is not easy after a bankruptcy filing. There are careful steps that must be taken, documents must be filed and kept in good order and credit should be methodically rebuilt, because having filed bankruptcy – despite the reasons for filing – does place the filer in a high-risk category and the opportunity afforded to qualify for additional loan(s) must be treated in the most serious and careful manner, if not cherished.