As an Asheville bankruptcy attorney, I frequently meet with folks who have been turned down recently by their bank for a mortgage loan. After speaking with the bank, and being rejected because of old debts clouding their credit report, they call me to assess how they can get their financial lives in order. Many times, a bankruptcy case can be the first positive step toward achieving the someone’s goal of home ownership.
Stopping the Repetitive Cycle
Most people know that a bankruptcy case has a negative impact on their credit report. However, many people do not understand that a bankruptcy case can end the repetitive cycle of late payments which continue month after month when folks fall behind on their bills. If you are behind and don’t see away you can get caught up, a bankruptcy case can permanently end the negative reporting. As time passes after bankruptcy, credit scores can improve quickly with the fresh start. Read this advice about improving your credit score more quickly after filing for bankruptcy.
One Year Waiting Period After Bankruptcy for FHA Mortgage Loans
The Federal Housing Administration’s “Back to Work – Extenuating Circumstances Program” currently allows consumers coming out of bankruptcy to qualify for a loan one year after a bankruptcy case. Following in the FHA’s footsteps, Fannie Mae has reduced the mandatory waiting period for a mortgage after bankruptcy to two years. Because of these changes, other factors typically determine when a bankruptcy filer will qualify for mortgage approval in the future.
The Two Biggest Factors
The two biggest factors for approval to buy a house, in my view, are: (1) the income of the borrower, and (2) the amount of their downpayment. After waiting the mandatory periods for mortgage approval, the lending bank will still determine whether your loan will be approved. The first factor is whether your income is large enough to support the monthly payment, and the second is how much of a down payment you are willing to put down. While some FHA loans require only a 3.5% down payment, many other programs require more. A very typical strategy for a client with dreams of home ownership is to start saving the money they are currently sending to credit card companies each month for a down payment on a new house instead after receiving a Chapter 7 bankruptcy discharge. Eliminating debt with bankruptcy can also free up more household income for a family’s mortgage expense.
Pause and Regroup
If you have been turned down for a mortgage loan, or never applied because you know what the answer will be, all is not lost. With careful planning and attention to your financial goals, you can set a course toward achieving your home ownership dreams. If you live in Western North Carolina, I would be pleased to speak with you during a free, initial bankruptcy consultation.
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