The answer to your question depends on when the bankruptcy occurred, the type of bankruptcy and the type of mortgage you apply for. Additionally, how the bankruptcy impacted your credit score also factors into the decision to apply for the mortgage as co-borrowers or as a sole borrower.
Lenders apply waiting periods after a bankruptcy is discharged before you can apply for a mortgage. The length of the waiting period varies based bankruptcy type, loan program and the factors that caused the bankruptcy. The waiting periods following a Chapter 7 Bankruptcy before you can qualify for a new mortgage are:
Conventional mortgage: four years
FHA mortgage: two years
VA mortgage: two years
The waiting periods are shorter if you experienced an extenuating circumstance such as a job loss, medical illness or divorce (for a conventional mortgage) that contributed to the bankruptcy. The waiting periods following a Chapter 7 Bankruptcy for a borrower with extenuating circumstances are:
Conventional mortgage: two years
FHA mortgage: one year
VA mortgage: one-to-two years
Please note that you are required to provide documentation to verify the extenuating circumstances or events that led to the bankruptcy if you apply for the shorter waiting period. For example, you may be required to provide a job layoff notice, medical records or divorce agreement, depending on your situation.
Mortgage guidelines for a Chapter 13 Bankruptcy are more forgiving. The waiting periods following a Chapter 13 Bankruptcy before you can qualify for a new mortgage are:
Conventional mortgage: two years
FHA mortgage: one year
VA mortgage: one year
For a Chapter 13 Bankruptcy, the waiting periods are relatively consistent even if extenuating circumstances contributed to the bankruptcy.
Review Waiting Periods Following Negative Credit Events Before You Can Apply for a Mortgage
So depending on when your bankruptcy was discharged and the loan program you are interested in, you may already be eligible to apply for a mortgage. There are other factors aside from the waiting periods, however, that determine your ability to qualify for a mortgage including your credit score, debt-to-income ratio and employment history.
For example, a bankruptcy can cause your credit score to drop approximately 130 to 200 points, depending on your score prior to the bankruptcy. The higher your score, the more severe the impact. Additionally, a bankruptcy stays on your credit report for seven years.
When you apply for a mortgage, the lower your credit score, the higher the mortgage rate you pay. A higher mortgage rates increases your monthly payment and reduces the loan amount you qualify for. Plus, if your credit score is too low, you may not be eligible for certain mortgage programs.
This is important because when two people apply for a mortgage as co-borrowers, the lender uses the lower credit score between the two applicants to determine your ability to qualify for the mortgage With a private money mortgage, you apply for the loan with a private money lender and then refinance the mortgage with a standard loan program after the waiting period no longer applies or the borrower’s credit score has increased.and to set your mortgage terms.
If your credit score has recovered since the bankruptcy then the impact should be minimal. On the other hand, if your credit score remains low due to the bankruptcy it may be challenging to qualify for the mortgage as co-borrowers with a spouse or partner or your loan terms may be more expensive.
In this case, your co-borrower should consider applying for the mortgage as a sole applicant. You can always add someone to the property title after the loan closes so you both of you own the property but sole applicant is responsible for the mortgage.
Use ourMORTGAGE QUALIFICATION CALCULATORto determine the mortgage you can afford
In this scenario, the sole borrower is required to qualify for the mortgage based on only her or his monthly gross income income, debt payments, credit score and other factors. Your income, debt, credit score and bankruptcy are not used to determine what size mortgage the sole applicant qualifies for. The downside to this approach is that by not including your income, the sole borrower may qualify for a smaller mortgage amount.
The table below outlines mortgage terms for leading lenders. We recommend that you contact multiple lenders to understand the difference in the loan amount you qualify for and your loan terms if you apply as co-borrowers as compared to applying as a sole borrower. Plus, shopping for your mortgage is the best way to save money on your loan.
If you are not satisfied with the mortgage amount you qualify for or if you do not want to wait to apply for a mortgage following the bankruptcy, you may want to consider a private money lender, also known as a hard money lender, as they do not apply waiting periods. Some applicants use a private money mortgage when they learn how small their loan amount is if only one personal applies.
With a private money mortgage, you apply for the loan with a private money lender and then refinance the mortgage with a standard loan program after the waiting period no longer applies or the borrower’s credit score has increased.
Review What You Should Know About a Private Money Mortgage
If you apply for a private money mortgage be sure to fully understand the higher mortgage rate, closing costs and possible prepayment penalty charged by the lender.
You can use our FREEandCLEAR Lender Directory to search for private money lenders in your state.
"B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit." Selling Guide: Fannie Mae Single Family. Fannie Mae, August 7 2019. Web.