Bankruptcy Questions Answered: How Do I Qualify for a Mortgage After Chapter 7 Bankruptcy?

If you have the dream of owning your own home, but you’ve just been through a chapter 7 bankruptcy, that goal could feel a long way off. We want you to be sure of one thing: all hope is not lost. Bankruptcy is not only legal, it’s a widely accepted and long-established way to discharge debt and make a fresh start. Instead of hindering your goals, it proves that you're ready and willing to do what it takes to right past mistakes and make a fresh start. 

At the same time, the reality is that a chapter 7 bankruptcy will likely delay your eligibility for a mortgage loan. So first off, take a moment to enjoy the fact that you’ve turned a corner in your financial life. Then get down to learning some key steps to take if homeownership is something you want to achieve in the future.

Focus on Credit

It’s common knowledge that a bankruptcy can hurt your credit score. It tells lenders that you’ve had some trouble repaying debt, and so holds you at a higher risk. But now that you’ve emerged from the process, and you’re on the other side of your chapter 7 bankruptcy, the focus should be on rebuilding credit.

Clearly, this won’t be possible by some traditional means, because a low credit score will disqualify you in some lenders’ eyes. So while a standard credit card with a generous credit limit is off the table, there may be some credit cards with lower limits and stricter parameters that could help you to reestablish your reliability as a borrower. 

A secured credit card is one great option. This credit-building vehicle functions like a credit card, but requires an initial security deposit. The bill is still paid monthly by you, and monthly status is reported to all credit agencies. The deposit is there to ensure that the lender isn’t left high and dry if you incur fees or neglect to pay. Of course the goal is to stay current, and this type of card allows even folks with damaged credit scores to use credit to their advantage. If all else fails, or if it's just more your speed, taking out a personal loan is always a reliable way to build credit. 

Remember though, that a loan or credit card can’t help you rebuild your credit if you take out or charge more than you can easily repay. Keep in mind the principles you learned as part of your bankruptcy classes on financial responsibility, and look toward future goals with determination.

Mortgage Options After Bankruptcy

Once you’ve worked at rebuilding your credit and you’re ready to start looking for the right mortgage for your needs, keep in mind that each type of loan and lender could have different requirements. Here are some general pointers for the most common types of mortgage loans.

Federal Housing Administration (FHA) Loans: at least two years must have passed since your Chapter 7 bankruptcy was discharged

Department of Veteran Affairs (VA) Loans: at least two years must have passed since your Chapter 7 bankruptcy was discharged and one of the following must be true––you served at least 181 days during peacetime, 90 days during wartime, or six years in the National Guard

United States Department of Agriculture (USDA) Loans: to buy property in a rural area at least three years must have passed since your Chapter 7 bankruptcy was discharged

These three types of loans are backed by various branches of the federal government, and the waiting period is less than it will be for a traditional loan. Conventional lenders will generally require that at least four years have passed since your chapter 7 bankruptcy was discharged, though each lender will likely have their own specific requirements.

Once at least two years are gone by, you can begin to plan for your next steps in your goal of homeownership, exploring available financing options that fit your circumstance. If you need to borrow using traditional means, then you’ll have even more time to focus on rebuilding credit. From here on out, making sound financial decisions is the best way to get on track to seeing your dream of owning a home fulfilled.

Get Your Bankruptcy Questions Answered by an Ohio Bankruptcy Lawyer

If you’re currently in the midst of a chapter 7 bankruptcy proceeding, it could feel neverending. But take heart––soon enough you’ll be on the other side of the process, looking toward future goals. We hope that this article will help you get there. If you need to consult with a seasoned chapter 7 bankruptcy lawyer about your specific situation, or need sound legal advice to move forward, get in touch with us at Hausen Law, LLC. Benefit from the expertise and skills of James F. Hausen. He has handled over 2,000 cases and serves the Akron and Canton areas. Contact Northeast Ohio Bankruptcy Attorneys to set up a free consultation and learn more about your bankruptcy options.