How Does Bankruptcy Affect Your Mortgage?
Jul 25, 2024
10-MINUTE READ
AUTHOR:
KEVIN GRAHAMIf you’re considering filing for bankruptcy, it’s natural to want to know how it will affect your existing mortgage and your ability to buy a home in the future. Some bankruptcies will allow you to keep your current home if you can stay up to date with payments.
Most people file for either Chapter 7 or Chapter 13 bankruptcy. Depending on the type of bankruptcy you go through, the waiting period before you can apply for a new home loan will vary.
What’s The Difference Between Chapter 7 And Chapter 13?
If you’re thinking about filing for bankruptcy, it’s important to understand which option is best suited to your situation.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as total bankruptcy. It wipes out much (or all) of your outstanding debt. With Chapter 7 Bankruptcy, you may be forced to sell or liquidate some of your property to pay back your debts. Chapter 7 is also called “straight” or “liquidation” bankruptcy. This bankruptcy option directly forgives your debts (with some exceptions).
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is more like a repayment plan and less like a total wipeout. With Chapter 13, a borrower files a plan with the bankruptcy court detailing how they plan to repay creditors. Borrowers will make partial or full debt payments based on what they can afford.
Liens and Bankruptcy
Liens play a pivotal role in bankruptcy proceedings and when a lender might have a right to foreclose on a home. When a lender lets you borrow money to buy a property, it places a lien on that property. A lien is a right or interest in the property that the lender has until the debt (or loan) is paid in full.
Even though some debts are forgiven during bankruptcy, existing liens on your property are still subject to foreclosure.
Filing Bankruptcy With A Mortgage
There are established procedures of due process for bankruptcy. You don’t automatically lose your house. Filing for bankruptcy also does not automatically accelerate the loan or make it due immediately, as long as you have been making payments on time up to that point.
How Does Chapter 7 Bankruptcy Affect My Existing Mortgage?
When you file Chapter 7, your existing property will be deemed exempt or nonexempt. Exempt means you’ll be able to keep the property throughout the bankruptcy process, as long as you can catch up and stay current on your payments.
Nonexempt means you’ll be required to surrender the property or pay its value in cash as a part of the bankruptcy. In some cases, homeowners are allowed to keep nonexempt properties. It all depends on the bankruptcy trustee and how they choose to handle the property.
When you file Chapter 7, you’re no longer legally obligated to repay your home loan. If you decide to stop making payments, there are still repercussions. This is because Chapter 7 doesn’t get rid of the lien on the property. That means your lender still has a right to the property if the debt isn’t paid.
If you can keep your home as part of Chapter 7, it’s probably a good idea to do everything in your power to keep paying your mortgage loan.
How Are Exemptions Determined In A Chapter 7 Bankruptcy?
Knowing how exemptions are determined is critical since your house must be considered exempt from the bankruptcy for you to have the option of keeping it. State or federal homestead exemptions determine how your home is handled in a bankruptcy. While specifics will vary by state, here are some factors that could affect exemption.
Length Of Homeownership
In most cases, you must occupy the house as your primary residence for a specified period before it can qualify for a homestead exemption in a bankruptcy proceeding. For example, if you file bankruptcy under the federal statute, you must own the home for 40 months.
Amount Of Equity
The second key determinant for an exemption is the amount of equity you have in the home, or how much of your home you currently own. State and federal statutes let you exempt a certain amount of equity from being used by a trustee to pay off creditors and lenders.
The exact amount of equity you can protect will vary, so be sure to check the limits in your state. Certain states allow you to double the amount of equity exempted if you file for bankruptcy jointly as a married couple.
When it comes to equity it’s important to know the set limit for your jurisdiction. Because Chapter 7 liquifies your assets to repay creditors, equity must meet requirements to be exempt. Otherwise, you could risk the profits from a home sale being used to pay creditors.
If you and your attorney determine that you don’t meet the limit, you might want to consider if filing for Chapter 13 is a better fit.
Reaffirming Debt
In certain situations, you may have the option of reaffirming the debt to avoid losing the house if you continue making your payments. When you do this, you are choosing to maintain the legal obligation to pay your mortgage. However, there are situations where you may be able to decide which exemption rules to apply. It’s best to talk with your bankruptcy attorney and mortgage servicer about your options and how to handle the process.
What About Chapter 13? What Happens With My Existing Mortgage?
With a Chapter 13 bankruptcy, you likely won’t lose your property. When you submit your bankruptcy repayment plan it should include the details of how you plan to repay your mortgage. In most cases, an automatic stay is issued once Chapter 13 is filed. An automatic stay means that creditors must stop collection efforts.
The stay was designed to temporarily halt foreclosure and stop repossession of homes regardless of the stage of foreclosure proceedings. This is an advantage of a Chapter 13 filing for homeowners with too much equity to qualify for a homestead exemption in their jurisdiction.
There’s an important caveat to be aware of here: You must stay current on any mortgage payments that are due after the filing. If you’re behind on your payments, you can include missed payments in your reorganization plan, but you have to make sure you pay all these debts back by the end of your plan timeline.
Can You Get A Mortgage While In Bankruptcy?
The short answer to this question is no. All major lenders and mortgage investors require that the bankruptcy be either discharged or dismissed before application. Many loan types require a waiting period before you can even apply.
Can You Get A Mortgage After Bankruptcy?
You can buy a house after bankruptcy if you meet the other qualifications. Depending on the bankruptcy type, with some nonconforming loans – like those from government agencies – you may not even have a waiting period. If you’re trying to buy a new house or refinance your current home after bankruptcy, there are options, but many loan types will have waiting periods.
How Does Bankruptcy Affect Your Credit Score?
It’s worth noting that a bankruptcy of any kind has a major negative impact on your credit. Before going through a bankruptcy, consider whether it’s your only option and know that the impact on your credit score can be huge.
Your credit score could drop nearly 250 points if you have a 780 FICO® Score. Because bankruptcy stays on your credit report, and each credit bureau reports it for 7 – 10 years, it should be a last resort.
The credit score drop also means that when you do requalify for a home loan, you may have a hard time getting competitive mortgage rates compared to borrowers with a similar down payment or amount of equity.
Since buying a house with bad credit can be challenging, you might have to build your credit first. A secured credit card or credit builder loan can help.
Waiting Periods After Bankruptcy
Each type of loan has a different waiting period after bankruptcy. The type of bankruptcy can also influence waiting periods. Lenders may also have their own rules, so if you aren’t sure, check in to see when you qualify.
How Long Do I Have To Wait After Chapter 7 To Get A New Mortgage?
Most reputable lenders, including Rocket Mortgage®, won’t consider you for financing until 2 years after the Chapter 7 bankruptcy has been discharged. If you find a lender who will consider you before 2 years, make sure you are fully aware of all the terms and conditions included in your mortgage. Be on the lookout for high interest rates, extra fees or indications that the offer could be a mortgage scam.
It’s important to note that your options for a mortgage will be limited after a Chapter 7 bankruptcy. FHA and VA loans require a 2-year waiting period after the bankruptcy has been discharged or dismissed before you apply. If you’re getting a conventional loan, you have to wait 4 years after discharge or dismissal before applying. Our Jumbo Smart loans have a 7-year waiting period following discharge or dismissal.
Chapter 7 Mortgage Type Waiting Periods: At A Glance
Loan Type |
FHA Loan |
VA Loan |
Conventional Loan |
Jumbo Smart Loan |
---|---|---|---|---|
Wait Period |
2 years after a dismissal or discharge |
2 years after a dismissal or discharge |
4 years after a dismissal or discharge |
7 years after a dismissal or discharge |
How Long Do I Have To Wait After Chapter 13 To Get A New Mortgage?
Rocket Mortgage and other lenders may give you the option of getting an FHA or VA loan as long as the Chapter 13 bankruptcy is discharged or dismissed before you apply. The waiting period for these loan types can be as short as 1 year if your lender can verify you’re up to date with your payment plan.
If you’re looking to apply for a conventional loan, it matters whether your bankruptcy was discharged or dismissed. In the event of a Chapter 13 discharge, the discharge date must be at least 2 years prior to the date credit is pulled and a minimum of 4 years since the filing.
If the bankruptcy was dismissed, there’s a 4-year waiting period until you can have your credit pulled for a new conventional mortgage.
Finally, jumbo loans still have a 7-year waiting period before you can apply.
Chapter 13 Mortgage Type Waiting Periods: At A Glance
Loan Type |
FHA Loan |
VA Loan |
Conventional Loan |
Jumbo Loan |
---|---|---|---|---|
Discharge Wait Period | No waiting period | No waiting period | 2 years before pulling credit and 4 years since filing | 7 years |
Dismissal Wait Period | 1 year | 1 year | 4 years before pulling credit | 7 years |
Waiting Periods For Past Bankruptcies
If you’re filing for Chapter 7 or Chapter 13 and you have a different type of bankruptcy in your past, it can change the waiting period for applying for a new mortgage.
Previous Chapter 11 Bankruptcy
You can get a mortgage through the FHA or VA even with a previous Chapter 11 bankruptcy, if the trustee discharged or dismissed the bankruptcy 2 years before you applied. The waiting periods for conventional loans and jumbo loans are 4 years and 7 years, respectively.
Previous Chapter 12 Bankruptcy
For a Chapter 12 bankruptcy, conventional loan policy differentiates between discharge and dismissal. If the bankruptcy is discharged, the borrower must wait at least 2 years after the discharge date before applying for a loan and must have filed the bankruptcy more than 4 years ago. In the case of a dismissed bankruptcy, the waiting period is 4 years.
FHA and VA loans don’t require a waiting period. The bankruptcy just needs to be discharged or dismissed before you can submit your mortgage application.
Filing for bankruptcy is a big decision with a lot of implications for your current and future financing. Make sure you discuss your options with a lawyer or your financial adviser before you stop making payments or file for bankruptcy.
Mortgage Type Waiting Periods With A Past Bankruptcy: At A Glance
Loan Type |
FHA Loan |
VA Loan |
Conventional Loan |
Jumbo Loan |
---|---|---|---|---|
Previous Chapter 11 Bankruptcy Discharge | 2 years | 2 years | 4 years | 7 years |
Previous Chapter 11 Bankruptcy Dismissal |
2 years | 2 years | 4 years | 7 years |
Previous Chapter 12 Bankruptcy Discharge | 1 year | 1 year | 2 years before applying and 4 years since filing | 7 years |
Previous Chapter 12 Bankruptcy Dismissal | No waiting period | No waiting period | 4 years after dismissal | 7 years |
Mortgage Bankruptcy Alternatives
If you’re considering a bankruptcy, you may want to explore your other options for getting out of debt first. Depending on the type of debt, your mortgage lender or creditors may be willing to work with you to set up a plan.
If You’re Having Trouble With Your Mortgage Payment
If you find yourself struggling with your mortgage payment, you have a few options for mortgage help. Some of these options may involve selling or surrendering your home, but they could avoid some of the negative financial consequences of bankruptcy.
If you’re in foreclosure or falling behind on payments, you can enter a process called loss mitigation with your lender. Loss mitigation can lead to a range of different outcomes.
Mortgage Modification
One potential outcome of loss mitigation is a mortgage modification, which involves changing the terms of your mortgage to incorporate missed payments into the balance. This could allow you to catch up on your mortgage payments without losing your home.
Short Sale
Another option is a short sale. This could be a path to avoid bankruptcy if you’ve looked at your financial situation with your servicer and can’t afford to make any kind of payment. Short sales generally occur when you can’t sell your home for what you owe on your mortgage. If you can prove hardship, your lender may allow a short sale. Your mortgage company would then help sell the property for less than it’s worth.
Be aware your lender may still pursue the balance you owe after the short sale in court. Make sure to check your state law on short sales before committing
Deed In Lieu Foreclosure
Finally, your lender could approve a deed in lieu of foreclosure. Under this arrangement, you sign the property over to your lender and they then sell the home. Your lender may forgive some or all of the difference between what you owe and what the property can sell for.
If you’re a Rocket Mortgage client having trouble making your mortgage payment, you can apply for assistance online with our Application for Success.
If You’re Struggling With Other Creditors
While your mortgage is significant, it’s likely not your only bill. Other lenders and creditors may work to negotiate with you if you can go through the process of proving hardship. If you can come to an agreement, you may be able to settle your debt.
It can be tempting to let unsecured debt default, but doing this will hurt your credit score. Paying something may make a creditor more receptive to giving you some debt relief.
There’s still a credit ding that comes along with having an account that’s paid as agreed rather than being paid in full, but it’s better than an account that goes to collections or charge-offs. It can help lessen the negative effect on your credit score.
The Bottom Line
Bankruptcy isn’t good for your mortgage or your credit score. However, you have options for keeping your home or buying a new one in the future.
It’s possible to get a mortgage after bankruptcy is dismissed or discharged. However, there is usually a waiting period before you can apply for another mortgage.
Are you looking for a new home, but you have a previous bankruptcy and strong credit? Rocket Mortgage can help you review your options. Apply for initial mortgage approval today or feel free to give one of our Home Loan Experts a call at (833) 326-6018.
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