When you make the difficult decision to declare bankruptcy, you may be comforted by the fact that this process can help you gain financial freedom. As such, when you complete this process, you may be excited to move on to the next chapter of your life by purchasing a home. Unfortunately, however, you may find that your bankruptcy filing will impede your ability. The following blog explores what you must know about obtaining a mortgage following bankruptcy, as well as the importance of working with a Memphis, TN consumer bankruptcy lawyer to assist you through this process.
Is There a Waiting Period to Get a Mortgage After Bankruptcy?
If you are considering bankruptcy in Memphis or anywhere in Tennessee, for that matter, it’s important to understand what you can expect from this process. In general, you’ll find that while you may experience significant financial relief after your debts have been discharged, it can drastically impact your credit score. As such, this can impede your ability to obtain loans, housing, and even jobs, in some instances.
Additionally, there is a waiting period following the closure of your bankruptcy case before you are eligible to pursue a mortgage application. This will depend on the type of loan for which you are applying and the type of bankruptcy that you filed.
Mortgage Waiting Periods After Bankruptcy in Tennessee
Here’s how long you must wait before applying for a mortgage following bankruptcy in Tennessee:
- Chapter 7
- FHA/VA loans: Typically two years after discharge
- Conventional loans: Typically four years after discharge
- Chapter 13
- FHA/VA loans: As little as one year into your repayment plan, with court approval
- Conventional loans: Typically four years after discharge
- Waiting periods may vary depending on:
- Credit score rebuilding
- Debt-to-income ratio
- Lender-specific guidelines
Loan Types and Waiting Period Differences
For example, a conventional loan often has the longest waiting period, requiring an applicant to wait four years following the end of their Chapter 7 and two years following the end of the Chapter 13 case.
However, the government loans for eligible borrowers, like those extended through the Veterans’ Association or Federal Housing Administration, carry shorter waiting times, often half of conventional loans. As such, you can obtain a mortgage two years after the discharge of your Chapter 7 case and one year following Chapter 13.
How Does Bankruptcy Impact Your Ability to Get a Mortgage in Tennessee?
In Memphis and throughout Tennessee, lenders often apply these standards consistently, though specific requirements may vary slightly based on the institution extending the loan
Filing for bankruptcy can significantly impact your credit score, which lenders will use to determine your eligibility for a mortgage. While this impact is temporary, it can play a considerable role in whether or not you are approved.
Key Financial Impacts After Bankruptcy
- Bankruptcy may remain on your credit report for:
- Chapter 7: up to 10 years
- Chapter 13: up to 7 years
- Lenders can view applicants as higher risk as a result of:
- Lower credit scores
- Limited recent credit history
- Prior debt discharges
- Despite this, many lenders will still approve loans if:
- Waiting periods have been met
- Credit scores have been rebuilt
- Income is stable
Mortgage Options Available After Bankruptcy
- FHA Loans:
- Lower credit score requirements
- Shorter waiting periods
- VA Loans:
- Available to eligible veterans and service members
- Offer more competitive terms and lower barriers
- USDA Loans:
- Available to those purchasing property in rural areas
- Income and location restrictions do apply
- Conventional loans:
- Stricter credit requirements
- Typically requires a stronger financial recovery
What Else Can I Do to Help My Chances?
Once the waiting period to apply for a mortgage has elapsed, it’s important to understand the steps you can take to help improve your chances of approval and favorable loan terms. As such, it’s imperative to begin rebuilding your credit after a bankruptcy filing.
How to Improve Mortgage Approval Odds
- Make all payments on time
- Keep your credit utilization low
- Build a consistent income history
- Save a larger down payment
- Avoid taking on new debts
- Monitor your credit report for errors
Practical Steps to Rebuild Credit
One option to help rebuild your credit is to apply for a credit builder loan. These are intended to help those who have filed for bankruptcy improve their credit score by extending small loans to be paid off over a period of time. By continually making on-time payments, you can reflect positively on your borrowing ability.
Additionally, it’s imperative to set a budget and stick to it. Unfortunately, many are enthralled by their newfound financial freedom and, as a result, begin spending outside of their means. However, setting a budget ensures you can meet your payments without falling back into debt.
You may also consider:
- Opening a secure credit card and maintaining low balances on the card
- Demonstrating responsible long-term financial behaviors
- Keeping old accounts open to build a credit history
Contact a Memphis Bankruptcy Attorney as Soon as Possible
As you can see, filing for bankruptcy can be incredibly impactful, which is why it’s critical to connect with an experienced attorney to assist you during this difficult process. At the Arnold Law Firm, our team understands how difficult these matters can be to navigate, which is why we are committed to helping you through these times. When you need assistance, contact us today to learn how we can fight for you.
