If you’ve filed for bankruptcy, if you are making payments to your Chapter 13 bankruptcy, or your bankruptcy has been discharged, you may be wondering what it means for your ability to get a home mortgage. Fortunately, it’s still very possible to get a mortgage after bankruptcy with the right preparation and knowledge. Knowing what to expect and how to prepare can help you make sound decisions during the mortgage process. In this article, I will explain the steps you need to take in order to get a home mortgage after bankruptcy. We’ll discuss everything from improving your credit score to getting pre-approved and finding the right lender. With the right preparation and guidance, you can be well on your way to getting a home mortgage after bankruptcy, possibly during your bankruptcy!
When you file for bankruptcy, your ability to get a mortgage is greatly limited. Bankruptcy is specifically designed to allow a debtor to reorganize and get back on their feet financially. It’s intended to be a temporary fix, not a permanent solution. Like any legal process, bankruptcy’s main goal is to allow you to get your financial house in order and put your financial life back in order. Making the effort to get a mortgage after bankruptcy is a great way to get back on track. After bankruptcy, your credit is seen as “damaged” by mortgage lenders, mortgage guidelines, and Underwriters. Credit scores and credit history are used by lenders to determine your ability to be approved, your interest rate and mortgage products. An overly low credit score can lead to higher interest rates, higher monthly payments, and possibly not being able to be approved for a mortgage. Before you begin the mortgage process, you should look at and analyze your credit score and credit make up. Lenders are going to be looking to see if you have re-established credit, really, lenders will want to see that you have current trade lines with some history of repayment. Lenders will want to see how you are handling that credit after your bankruptcy, keeping your balances low, and ensuring no accounts are reporting late payments.
Every mortgage program has their own guidelines and rules for how long you have to wait before you can be pre-approved for a mortgage. Why do you have to wait? When I was a mortgage underwriter I was told that we don’t care that a borrower had to have a bankruptcy to improve their financial situation, we care about whether they learned from having to have that bankruptcy. Time allows for Underwriters to make that decision as to how you are and will handle your credit.
How long you have to wait will depend on what bankruptcy you have used or you are currently in, Chapter 7 or Chapter 13 bankruptcy.
For a Chapter 7 bankruptcy you will have to wait from 2 to 4 years from the DISCHARGE DATE depending on the mortgage program, FHA and VA mortgages requires a 2 year wait, the USDA mortgage programs requires a 3 year wait, and for the most part both Conventional mortgage programs require a 4 year wait.
Of the two Conventional mortgage programs Freddie Mac is a bit more lenient. If your bankruptcy is reflected on your credit report and we get an automated underwriting approval then there is no waiting period.
For a Chapter 13 Bankruptcy, it gets very interesting. You will need to wait 12 months from your FILING DATE for FHA, VA, and USDA as long as you have made your last 12 bankruptcy payments in full and on time. Making it possible to get a mortgage approval while you are still paying on your Chapter 13 bankruptcy.
Also, we will need to get permission from the Court to allow you to get a new home and mortgage. With a Conventional mortgage, it is a 2 year wait from the discharge date or 4 years from the dismissal date.
Once you have examined your credit scores, you want your scores to be in the 600 credit score range especially if you are considering FHA or VA. If you want to consider USDA or Conventional you will want your scores to be nearer to 640. The credit scores you will need will depend on the lender and their overlays to the guidelines and the mortgage program. Once you are sure you have re-established your credit and there are no late payments on this credit, and you have cleaned up any mistakes on your credit report, you are ready to get pre-approved for a mortgage. Pre-approvals can be beneficial for a number of reasons. It gives you an idea of your likely mortgage payment, which is helpful for budgeting. Being pre-approved will allow you to know how much of a sales price you should be considering. Being pre-approved will simply provide you with peace of mind. It also lets your real estate agent and the seller know that you’re likely able to get financing, which can help speed up the home buying process. Pre-approval gives you an advantage over other borrowers.
Now that you know what to expect and what documents to assemble, it’s time to figure out what your monthly mortgage payment will be. This is a critical part of the mortgage process and will have a big impact on your loan terms and amount. Your monthly payment is based on a number of factors, including the amount of your loan amount, loan interest rate, and loan term. To figure out your loan payment, you’ll need to consider all these factors and make a realistic estimate. The good news is there are a number of ways to estimate your payments. You can use a mortgage calculator, discuss it with a lender, or simply make an educated guess. It’s important to use a realistic method and not over-inflate your payment estimate.
Know your budget and have a total house payment in mind that works within your budget. Know what that maximum house payment is that you will not go a dollar over, this will help you and your loan officer establish the maximum sales price that you can be approved for and still not be house poor.
In some cases, lenders may require you to obtain mortgage insurance. This insurance protects the lender in case the borrower doesn’t repay the loan. It comes with a cost, which is included in your monthly payment amount. Although it may be required by your lender, you should still carefully consider this additional cost before choosing to obtain mortgage insurance. Mortgage insurance is designed to protect lenders in the event of a loan default. A loan without this insurance would result in a lower monthly payment amount. However, it’s important to note that the insurance is only payable if you’re late on your payments.
Finding the right lender is crucial in the process of getting a mortgage after bankruptcy. There are a number of factors to consider when choosing your lender, including their mortgage knowledge and experience, ease of loan application process, can they do manual underwriting, and do they have any guideline overlays. Make sure to look around and ask a lot of questions. You may be able to find better options and interest rates as you look for the right mortgage lender. Once you’ve found a lender that you’re comfortable working with, make sure to clearly communicate your needs. Know what you’re looking for, including how much you’re willing to borrow, how much you’re able to put down, and what type of loan you’d like to use. If you’re unable to fully explain your needs, a lender may push you towards a loan that isn’t a good fit. A home buyer that does their HOME WORK will be appreciated by the mortgage loan officer they work with.
Before and after the mortgage pre-approval you will be asked for your filed bankruptcy documents, all pages. If your bankruptcy has been discharged you will be required to provide the Discharge Letter provided from the court.
If you are in the midst of paying your Chapter 13 you will be asked to get a letter from the Trustee involved for permission for you to purchase a new home. Also, you will be asked to document that you have made the most recent 12 or more payments to the court on time. These documents and then the standard documents for a mortgage pre-approval application, that will include paycheck stubs, W2 or 1099 forms, bank statements, and possibly tax returns. Your loan officer will know what they want and need.
When you’ve finished the mortgage process and have your loan documents in order, it’s time to find a new home. This is a crucial step in the process and can have a big impact on your next new home. Hiring a real estate agent to be your buyer’s agent will allow you to shop around and compare homes. You can also use their expertise and contacts to help you find the perfect new home. Hiring a real estate agent can be beneficial for a number of reasons. They can help you navigate the home buying process, make comparisons between houses, and help you find the perfect home on your budget. They can also help you negotiate on prices, concessions, and get the best deal possible.
Congratulations! You’ve completed the mortgage pre-approval process and are ready to find your new home. As you finalize the purchase, make sure to include all these steps in your mortgage closing checklist. - Get a home inspection. The home inspection is helpful for identifying potential problems with the home, and save you from making costly decisions. - Get your home insurance policy in place. Make sure to have your homeowners insurance in place before closing on your new home. Get quotes as home owner’s insurance can vary a lot between insurers. Start with the insurer that has your car insurance as they will offer a multi-policy discount. Once you have found the best quote, put it into place. Get your mortgage documents to your mortgage lender as soon as possible. The more you are ready the faster you can close on your next new home.
You have gone through or you are currently in a bankruptcy? Are you looking to purchase a new home? Don't let bankruptcy stand in the way of realizing your dream of home ownership. With the right guidance, you should be able to get a mortgage after or during bankruptcy. I specialize in helping home buyers who are in Chapter 13 or have had a bankruptcy discharged get a mortgage sooner. I can help you can get the home of your dreams without having to wait years after bankruptcy. Take the first step today and contact me to find out how you can get a mortgage after or during bankruptcy. I will guide you every step of the way towards a new home and a brighter financial future.
If you want to make an appointment to talk here is a link to my calendar where you can schedule a convenient time to talk, https://calendly.com/bobrutledge. If you would like to learn more follow this link to my website to learn a lot more, https://www.bobrutledge.com/mortgage-after-bankruptcy
2018 Guide to Qualifying for a Mortgage with IBR Student Loans
When you have student loans, qualifying for a mortgage can get tricky.
Student loan guidelines have changed yet again. This is your ultimate guide to understanding how these changes will affect you in 2018.
Understanding IBR
When you begin to make payments on your student loans, you may have several options.
You may be making payments on your student loan based on your income. This is called an Income Based Repayment (IBR) plan.
IBR plans typically will not cover the principal and interest due, and the loan balance may increase even though you are making payments.
If your payment is based on a calculation that pays off your loan in full at the end of a loan term, this is an amortized payment.
All underwriting guidelines with all lenders will allow you to use an amortized payment when calculating your debt to income ratio.
IBR plans could also leave you with a $0.00 payment, even though your loan is in repayment status. Your income is reviewed every year to determine your new payment over the next year.
Student Loan Payment Change History
More and more students are straddled with student loan debt for years after leaving school.
Being chained to student loan debt requires an experienced locksmith to unlock the correct guidelines to get you approved for a home loan.
It’s almost a full time job keeping up with the updates to the underwriting guidelines, and IBR payments seem to send many loan officers into a tail spin of misinformation.
Student Loan Guideline Changes Since 2015
2 times for Fannie Mae Conventional Loans
2 times for Freddie Mac Conventional Loans
1 time for FHA Insured Loans
2 times for VA Guaranteed Loans
1 time for USDA Guaranteed Loans
The first major change to the underwriting guidelines happened when lenders were no longer allowed to ignore deferred payments or loans in forbearance.
The second major change was that you had to apply a payment to any student loan balance. If the payment reporting on your credit report will not pay off the loan at the end of a fixed term, your payments are not amortized.
Non-amortized payments became public enemy #1 by Fannie Mae, FHA, and USDA. In 2015, Freddie Mac guidelines did not allow for deferred payments or loans in forbearance, and would allow IBR payments, even if the reported payment is $0.00.
Calculating Your Debt to Income Ratio (DTI)
The entire student loan debacle is being caused by confusion around how your debt to income ratios are calculated.
Your debt to income ratio is calculated as your proposed housing payment (when buying a home) plus your monthly liabilities from your credit report, as a percentage of your gross income.
When using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.
Borrowers using a FHA mortgage have 2 DTI ratios. A front-end debt to income ratio is your housing payment as a percentage of your income. A back-end debt to income ratio includes your monthly liabilities from your credit report.
FHA will allow your housing payment to be as high as 46.99% front-end DTI, and a maximum 56.99% back-end DTI including your debts.
Student loans become confusing when no payment is reported on your credit report, or when your payment is an Income Based Repayment (IBR) payment.
2018 Student Loan Guidelines Snapshot
Fannie Mae Conventional
Non-amortized Payment – IBR Ok, even with $0.00 payment – Updated April, 2017
Amortized Payment – Ok with all lenders
Deferred or forbearance use 1% of loan balance.
Freddie Mac Conventional
Non-amortized Payment – Must use .5% of loan balance – Updated February, 2018
FHA Government Insured
Non-amortized Payment – Not Allowed | Must use 1% of loan balance
VA Guaranteed Loan
Non-amortized Payment – Not Allowed | Must use 5% of loan balance divided by 12
USDA Guaranteed Loan
Non-amortized Payment -Not Allowed | Must use 1% of loan balance
Freddie and Fannie Swap Guidelines
Interestingly enough, Fannie Mae and Freddie Mac have since swapped positions on IBR payments as of the most recent update by Freddie Mac in February 2018.
Freddie Mac no longer allows for IBR payments, while Fannie Mae does since April 2017. Fannie Mae will even allow an IBR payment with a $0.00 payment.
If you have an IBR payment that is equal to less than .5% of the balance of your student loan, Fannie Mae is your option for being able to use the payment as reported on your credit report.
Creative Solutions to Solve Student Loan Problems
If you are trying to buy a home, and the pieces just aren’t fitting together, here are some creative solutions that past clients have successfully done.
Payments Deferred or Loan in Forbearance
If you have loans with deferred payments, or if your loan is in forbearance, we have had homebuyers go into an income based repayment plan, and qualify using a Fannie Mae Conventional
Parents Co-Sign and Pay Student Loan Payment
Fannie Mae recently updated their “Contingent liability” guideline to allow student loan payments to be ignored, if you can show that a co-signer has made the payments for the past 12 months.
Debt to Income Ratio too High for Conventional
This home buyer is consolidating over a dozen loans into a 30 year amortized payment. We needed an amortized payment to take advantage of more flexible DTI requirements over Conventional.
Payment Not Showing Up on Credit Report
If you loan is in repayment, your lender can get a credit supplement (if needed) from the credit bureau by providing them with a copy of your statement from your student loan lender.
Have Less than 5% Down Payment and IBR Payment
It is a common misunderstanding that FHA offers the lowest down payment. VA & USDA offer 100% financing, but additional qualifying is required.
Both Fannie Mae and Freddie Mac have programs that allow for as little as a 3% down payment. Eligibility can be determined by income limits, or the area you are buying in.
There are no income limits for homes being purchased in “targeted” low to moderate income. These special programs also include discounted mortgage insurance and discounted closing costs.
Why Lenders Get it Wrong
If you’re calling from a TV, radio, or internet advertisement, you are most likely being connected to a call center, where the “Loan Officer” has little to no actual mortgage experience. You can look up the experience of your Loan Officer at http://nmlsconsumeraccess.org/ and see when they got their mortgage license and what they were doing before they became a mortgage loan officer. (YOU WILL BE SURPRISED!)
I call these “big box” lenders. These lenders are amazing at processing a certain type of loan file that does not require anything too far outside the box. They only want and really can only do the vanilla stuff.
If you are working through a big box lender, here is what is really happening, your application is not getting in front of a professional until it reaches the underwriter.
Many times, your file is not in front of the underwriter until after you’ve already accepted your purchase offer and paid for the appraisal.
Hopefully, there’s enough time, and the underwriter is experienced enough to look up the guidelines, and can figure out how to save your new home by getting you approved for the right loan.
I wouldn’t believe this happens as much as it does if I didn’t see it professional so often! So many of these horror stories we hear could have been avoided if a professional loan officer was used, and not a call center lender.
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