Mortgage  Question?
Mortgage Options for Borrower Spouse with Bankruptcy

My credit score is low and my fiance has a bankruptcy on his record but we would like to buy a home as soon as possible. What are our options for getting a mortgage?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

You have two primary options for getting a mortgage to buy a home. Your first option is to apply for a mortgage with traditional lenders as a sole borrower without your fiance being on the mortgage.

Applying for a mortgage as a sole borrower may make sense because traditional lenders such as banks and mortgage brokers impose waiting periods following derogatory credit events such as a bankruptcy, default or foreclosure and the length of the waiting period varies depending on the type of event. These waiting periods may prevent your fiance for applying for a mortgage as a co-borrower with you. For example, for a Chapter 7 Bankruptcy the waiting period is four years for a conventional mortgage and two years for an FHA or VA mortgage. The waiting periods are shorter if your fiance experienced an extenuating circumstance such as a job loss, medical illness or divorce that contributed to the derogatory credit event. For example, if extenuating circumstances contributed to a Chapter 7 Bankruptcy, the waiting period is two years for a conventional mortgage, one-to-two years for a VA loan and only one year for an FHA loan. The waiting periods for a USDA Loan may be even shorter but you are required to live in a designated rural area to qualify for the USDA Mortgage Program. We provide a comprehensive overview of the mortgage waiting periods following negative credit events on FREEandCLEAR that you should review.

The downside to applying for a mortgage as a sole borrower is that your fiance's income is not used to determine what size mortgage you qualify for so you qualify for a smaller loan amount. You can use our Mortgage Qualification Calculator to determine what size mortgage you can afford based on your monthly gross income and debt. The HomeReady and FHA Mortgage Programs may enable you to include "rent" from your finance to increase your income when you apply for a mortgage and you should use our INTEREST RATES function to contact multiple lenders to understand if this possible. When you contact lenders be sure to also ask about mortgage programs for credit-challenged borrowers.

Your second mortgage option is for you and your fiance to apply for a mortgage with a non-traditional lender. There are non-traditional lenders, also called hard money or private money lenders, that may provide mortgages within a year or even a month of bankruptcy but these lenders typically charge a much higher interest rate and closing costs than traditional mortgage lenders. Hard money lenders also usually impose certain qualification requirements that are stricter than standard mortgages. For example, most hard money mortgages permit a maximum loan-to-value (LTV) ratio of 70% or less as opposed to the 80% - 90% LTV ratio permitted for standard mortgages and the 96.5% LTV ratio limit for an FHA Mortgage. Most borrowers who obtain a hard money mortgage attempt to refinance into a standard mortgage within one-to-two years after their personal, financial or credit profiles have improved. We provide a comprehensive overview of hard money mortgages as well as Six Things You Should Know About a Hard Money Mortgage on FREEandCLEAR.

Your best option may be for you wait until your credit score has improved and consider applying for an FHA mortgage in one-to-to years. Your other option is to consider applying for a mortgage with a hard money lender now and refinance that loan with a standard mortgage as soon as possible. If you do apply for a mortgage with a hard money lender be sure to fully understand the higher interest rate, costs and fees, including any pre-payment penalty, charged by the hard lender.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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