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In this episode of Ask Ralph, the host, Ralph Estep Jr., discusses the topic of "Getting a Mortgage After Bankruptcy." He acknowledges that declaring bankruptcy can have a significant impact on one's finances, including a drop in credit score and its...
Navigating Getting a Mortgage After Bankruptcy: Steps and Strategies
In this episode of Ask Ralph, financial expert Ralph Estep, Jr. discusses the key steps to getting a mortgage after filing for bankruptcy. Despite the financial restrictions that a bankruptcy can bring, possible home ownership is explained. Ralph unpacks the standard waiting periods for applying for a mortgage post-bankruptcy and how they vary depending on the type of bankruptcy filed and the type of loan you're seeking. He emphasizes the importance of credit rebuilding during the waiting period and presents ways to accomplish it. He also presents an overview of different mortgage options suitable for different scenarios, and the importance of pre-approval in the home-buying process. The episode wraps up with the assurance that despite the complexities of bankruptcy, achieving financial dreams including home ownership is still possible with a solid plan and diligent research.
00:00 Introduction and Listener's Question
00:33 Understanding Bankruptcy and Its Impact on Home Buying
01:28 Types of Bankruptcy and Waiting Periods
03:02 Rebuilding Your Credit After Bankruptcy
04:27 Exploring Different Mortgage Options
05:43 The Importance of Mortgage Pre-Approval
06:33 Conclusion and Final Thoughts
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Ep 22 - There's Hope for Getting a Mortgage After Bankruptcy
[00:00:00] So the question of the day is, Hey, Ralph. During COVID I had severe financial hardships and I ended up filing bankruptcy. I've been thinking about buying a home. But I'm wondering if I can really get a mortgage after my bankruptcy. Will you help me with the steps I need to take to get a mortgage? We're going to answer that question today.
Welcome back listeners to another episode of Ask Ralph. The podcast where we dive deep into topics that matter to you. I'm your host Ralph Estep, Jr., Today, we have an important topic to discuss. Buying a home after bankruptcy.
[00:01:00] Having a bankruptcy on your record can feel financially restricting. Declaring bankruptcy can cause your credit score to drop significantly. And we'll stick around on your credit report for up to 10 years. But that doesn't mean it's impossible to buy a home after bankruptcy. It just may require some time and effort to ensure your credit is solid and you're financially stable.
Well, let's start by understanding the waiting period after bankruptcy, before applying for a new loan, including a mortgage. The length of waiting period. Depends on what type of bankruptcy you filed for. Well I've said before, I'm not an attorney, but let's talk about the two general types of personal bankruptcies.
The first form is chapter seven. This is the most common form of bankruptcy, allowing someone to completely eliminate debt after a specific amount of time. For chapter seven bankruptcy theres typically a four year waiting period after discharge [00:02:00] or dismissal date to get a mortgage.
Now the other type is a chapter 13. A chapter 13, bankruptcy, restructures debt through a repayment plan over time. While allowing you to keep some assets. For chapter 13, bankruptcy there's usually a two year waiting period from the discharge date. And a four year waiting period from the dismissal date. Now you want to speak to an attorney about the specifics of those times, but that's generally the rules when it comes to applying for a mortgage.
Now, the waiting periods also vary depending upon the type of loan you're looking for. For conventional loan is generally four years. For USDA loans, it's generally three years.
And for VA home loans or FHA mortgages, it can be as short as two years. And we'll talk about those different types of little later in the program.
If becoming a homeowner sooner rather than later is important to you. Government backed loans often come with shorter waiting periods, but may have more restrictions.
That's why I mentioned the USDA at three years. And the [00:03:00] VA or FHA at two years.
Well, while you're waiting for the appropriate timeframe, based on your situation, it's critical to focus on rebuilding your credit score. The truth is bankruptcy can cause significant drops in credit scores ranging from 130 points to over 200 points. Depending on your original score.
So the question is Ralph. How do I rebuild and restore my credit? Well, that's a great question. And I'm going to answer that question right now.
To rebuild your credit. Start by making all existing loan and credit card payments on time. And in full each month. Payment history is the most significant factor that goes into your score. So paying bills promptly is crucial. Avoid the behaviors or habits that got you into debt in the first place.
We discussed this very topic on a podcast a few weeks ago. So I would encourage you to go back and listen to it. Using a secure credit card can also help build credit. With a secured card, you provide a [00:04:00] security deposit as collateral. Which serves as your credit limit this way you won't spend more money than you have, but can still build your credit score through on-time payments.
Another option for building credit includes becoming an authorized user on someone else's card or getting a credit builder loan. The truth is no matter what method you choose, make sure to pay all your payments on time. And keep your balances low to show responsible behavior to lenders.
Once you're able to get a mortgage it's time to shop for a mortgage.
Yes. You heard me, right. You can shop for a mortgage. So let's talk about shopping around for different mortgage options.
FHA loans issued by the federal housing administration have some of the easiest requirements making them a good option for those with past bankruptcy. If you have a 580 or above credit score, you only need to put down three and a half percent to qualify for an FHA mortgage.
USDA mortgage offered by the us department of agriculture designed for potential home buyers, looking in rural [00:05:00] areas. With these loans, there's no down payment requirement, but typically require at least a 640 credit score. And it must be in qualifying areas.
Another option is VA loans. They're available to active military personnel, veterans and eligible surviving spouses with no down payment requirement. So long as they meet specific military service requirements. And have a score of at least 580.
Conventional loans, follow guidelines set by Freddie Mac and Fannie Mae. But are not government backed like FHA or USDA loans. Most conventional loans require at least a 3% down payment and typically require credit score is 620 or better. Depending upon the lender specific criteria.
Before applying for any loan program mentioned above. It's a good idea to get pre-approved. Mortgage preapproval allows you to know if you're ready to buy a home without affecting your credit score. By providing information about your financial situation, the lender will send you a pre-approval letter. Conditionally allowing [00:06:00] you to get a mortgage. Most reputable realtors are going to require a pre-approval letter before they even will write a sales contract for a home purchase the significant benefit of preapproval is that it won't require a hard credit check, which can lower your score. After working hard to rebuild your credit. The last thing you want is for your score to drop due to unnecessary inquiries.
Pre-approval also estimates how much the lender is willing to let you borrow and helps determine how large a mortgage you can afford. Some lenders provide instant pre-approvals within minutes while others may take several days.
In conclusion, dealing with bankruptcy can be complicated and stressful. However, it's still possible to pick yourself back up and work towards your financial dreams, including owning a home. Having a solid plan in place for rebuilding your credit and diligently researching the best loan options for you will put you in the best position when you're ready.
Remember this podcast episode was brought to you by Saggio Accounting+PLUS your best choice for business and personal [00:07:00] accounting services. And I encourage our listeners to visit them at www.askralph.com.
I encourage our listeners to visit our podcast page at www.askralphpodcast.com and leave us a review or voicemail message with any questions or topics that matter most to you.
Well, thank you for joining me on this informative episode of ask Ralph. Be sure to share this podcast with friends and family who may find it helpful in their journey towards home ownership after bankruptcy.
Before I sign off, I say, take care. God bless you. And always stay financially savvy. [00:08:00]
