Buying a Home & Getting a Loan While in Chapter 13
How long I need to wait to get a new mortgage if I'm in a Chapter 13 bankruptcy?
I am in a Chapter 13 bankruptcy now (long story), have a steady income, and am wondering when I will qualify for a mortgage again. I know that bankruptcy stays on your credit report for 10 years, but is that how long I need to wait?
Since you are currently in a Chapter 13 plan, your ability to obtain a home loan will depend on when your bankruptcy plan will be completed.
Buying a house while in Chapter 13
It is unlikely that you will be able to find a new mortgage while you are still in an active Chapter 13 payment plan. Even after your case is discharged, usually after making payments for five years or until all of your debts have been paid, you may have trouble obtaining a loan for at least a couple of years. This time between the end of your plan and when you can qualify for a loan is called "seasoning" in the mortgage business.
A bankruptcy filing will result in a serious derogatory mark on your credit profile, which will prevent you from qualifying for many loans, especially in today's tight credit market. While I do not think it is impossible for you to find a loan, I expect that you have a lot of work ahead of you, and you should expect to pay a premium in interest and costs for any loan you are able to obtain. In 2005 or 2006, I would have been much more optimistic about your prospects for finding a loan after your bankruptcy is complete, but the sub-prime mortgage market, which offers loans to individuals with credit problems, took a nosedive, making it much harder for borrowers with less than perfect credit to find a loan.
I do not want to sound totally discouraging, though. Your ability to qualify for a mortgage loan will depend on several factors aside from your credit score, including your income, your performance on other secured accounts, and the amount of money you have available for a down payment. Also, the positive payment history on your credit cards should help improve your overall credit worthiness. If you have a good income and a sizable down payment, you may be able to find a decent loan despite your bankruptcy and credit problems.
Boost your chances of getting a loan
If you cannot find a loan that suits your needs, you may want to continue working on your credit score. The more you can increase your credit score, the better loan terms you should be able to obtain. Also, the more time that elapses, the less negative influence your bankruptcy filing should have on your credit rating, allowing your positive trade lines to exert a stronger influence on your overall credit rating.
But remember that your credit score is just one piece of the puzzle. You also need steady income and an attractive debt-to-income ratio.
I recommend you download a Uniform Residential Loan Application (Form 1003), complete it, and begin mortgage shopping. Start with the Bills.com mortgage saving center for no-cost, pre-screened quotes from mortgage lenders.
For an FHA loan the applicant needs to show steady employment, a low debt-to-income ratio, a credit score of at least 580, and two years passage of time from a bankruptcy or foreclosure. To learn more about FHA loans, see FHA Mortgage Types and New Mortgage Regulations - What You Need to Know.
There is no requirement that you get an FHA loan. To learn more about your mortgage options, see Mortgage Basics to Know Before You Apply for a Loan.
A home purchase is a major investment, so do not act too hastily. Take your time to make sure you are in the best financial position possible before buying a home. The most important piece of advice I can offer is to make sure you do not borrow more than you can realistically afford to repay. The number of home foreclosures skyrocketed in 2008 and 2009 due to consumers' inability to keep up with their adjustable interest rates, so make sure that you do not fall into that trap. The risk of running into this problem has decreased significantly due to the crisis in the sub-prime mortgage market, but you should still be careful in examining all of the terms of a loan before signing any agreement.
I wish you the best of luck in finding a loan that allows you to purchase the home of your dreams. I hope that the information I provided helps you Find. Learn. Save.