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Getting a mortgage after bankruptcy

| Jun 30, 2021 | Bankruptcy

While bankruptcy provides debtors in Jackson, Mississippi, with a fresh start, it usually remains on credit reports for several years. Lenders commonly hesitate to approve debtors whose bankruptcy recently got discharged. It doesn’t make getting a mortgage impossible, but it is tricky.

Mortgages in bankruptcy

The way mortgages are handled in bankruptcy depends on the type that debtors file. Mortgages are secured debt, or debt with collateral, which means they get paid first. The debtor must sell nonexempt assets, or nonessential property, in Chapter 7 bankruptcy to pay creditors. If the home is not exempt, the debt gets discharged, and the debtor commonly loses the home.

Under Chapter 13, the debtor may include the mortgage as part of their repayment plan without losing the property. Regardless of the type, bankruptcy does not remove liens and only removes personal liability. The debtor must keep the mortgage payments current even if the debt gets discharged.

Applying for mortgages after bankruptcy

Most lenders will not approve borrowers less than two to four years after a Chapter 7 discharge, but it depends on the type of loan. Conventional loans or jumbo loans require the debtor to wait seven years to apply. However, many lenders make exceptions if the borrower can prove that a hardship caused them to file.

Federal Housing Administration loans offer more flexibility with adjustable or fixed rates. Chapter 13 filers may be able to get an FHA loan if they make 12 months of timely payments on their plans, and Chapter 7 filers must wait two years.

A Veteran’s Administration loan is primarily for service members with a two-year minimum waiting period. Many lenders prefer a reestablished credit score of 620 after bankruptcy, but this type of loan doesn’t require down payment.

Some bankruptcy cases seem simple, but mistakes can get the case dismissed. A debtor considering bankruptcy should seek an attorney’s advice to make the process smoother.