When prospective clients come to my office I often must deal with concerns people have about how bankruptcy will affect their credit in making future purchases. Most often the question takes the form of whether or not they will be able to get a mortgage on a home. While it used to be the general rule that you might need to wait 7 years after a
bankruptcy or foreclosure, I have had clients who have told me a few years (3 years for a chapter 7) after completing their bankruptcy they are under contract to purchase a home. I have even been able to get a client while still in a chapter 13 case approval from the bankruptcy court to purchase a home with creative financing arrangements. I came across a recent article in the Chicago tribune about time frames for getting a mortgage after a bankruptcy or foreclosure.
The article discussed the general rule on time frames to get a mortgage after bankruptcy or foreclosure is now about 3 years. It further said depending on the reasons for the bankruptcy or foreclosure the time frame may be less, even as little as 12 months, if the
bankruptcy or foreclosure is a result of “extenuating circumstances” over which you have no control. These circumstances include job loss, serious illness or death of a wage earner. However, divorce or business failure or being overwhelmed by too much debt is not considered life events which are extenuating. But proving the life event is only one step in the process. You must also be able to show you can make monthly payments and keep your credit clean after the bankruptcy or foreclosure.
The type of mortgage you are seeking affects how long you may need to wait.
• VA Loans—12 months after filing chapter 13 if you can receive court and trustee approval for the loan. 24 months after filing chapter 7 and receiving a discharge, but according to the article in the Tribune it could be less with extenuating circumstances. The wait is the same if you did a deed in lieu of foreclosure or a foreclosure. However, you can be protected from any second mortgage deficiencies by filing a bankruptcy and then turning over the house.
• FHA Loans—the rules are essentially the same as a VA loan and if you were to go through a short sale or foreclosure the wait is at least 3 years, but potentially shorter with extenuating circumstances.
• Conventional Loans (which are generally purchased by Fannie Mae or Freddie Mac)—the waiting period is tiered. Borrowers who suffered a life event discussed above the period of time to wait are approximately 24 months. If you have not suffered such an event the time period goes up to 48 months. According to Freddie Mac's guidelines, if a borrower's financial issues were due to his own financial mismanagement, a credit status must be re-established for at least 84 months if they was foreclosed upon. The time period could be 60 months if they filed more than one bankruptcy petition in the past 7 years or 48 months after the discharge or dismissal of a Chapter 7 bankruptcy. If there is conveyance of a deed in lieu of foreclosure or a short payoff related to a delinquent mortgage the period could be 48 months. The wait to get a mortgage is 48 months for all other substantial adverse or derogatory credit reporting. It is just 24 months from the discharge date of a Chapter 13 bankruptcy. If “extenuating circumstances” can be shown, and if the credit report indicates the borrower has re-established an acceptable credit reputation, he still will have to wait 36 months if he went through a foreclosure or filed more than one bankruptcy petition in the past seven years. But the wait is just 24 months if his bankruptcy was discharged or dismissed, if he went through a short sale or deed-in-lieu, or if he suffered another significant adverse or derogatory credit event.
Only an experienced bankruptcy attorney can give you a full picture of what your options include.
