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When should I apply for a mortgage after a Chapter 7 or 13 bankruptcy?


Filing for bankruptcy doesn’t have to end your goal to be a homeowner. You can turn the corner and get back on your feet.

We’ve worked with a number of home buyers who have bankruptcies on their record. Generally, most home buyers in this scenario come from filing Chapter 7 or 13 - Chapter 13 being the most common. According to Total Bankruptcy, “In 91 percent of cases, filers identify job loss, divorce or medical expenses as a reason for filing.” Chapter 7 is geared for people without assets and low income, and Chapter 13 is a reorganization where customers are able to make monthly payments but just need some help getting back on their feet.

However, there are more bankruptcies than just Chapter 7 and 13. Although we will take a deeper look at Chapter 7 and 13 in this article, let’s break down the difference between the types of bankruptcies that can alter your home buying journey.


Types of Bankruptcies.

Chapter 7Chapter 7 bankruptcy is also known as “liquidation” or “straight bankruptcy.” In this case, the debtor’s assets are sold, creditors receive payments, and then the debtor is free from their debt. You can start over with a clean slate, but there are drawbacks - depressed credit score and loss of property. Remember: The rules vary depending on the type of case you want to file, and the laws changed in 2005, which make it more difficult to qualify for Chapter 7 relief.

Chapter 13Chapter 13 is known as a reorganization bankruptcy and is used by debtors whose income exceed Chapter 7’s limits. Rather than having to sell off assets, debtors can set up repayment plans to gradually eliminate their debt. The repayments to creditors happen during the span of three to five years.

Chapter 11 (least common)Chapter 11 bankruptcy is intended to help businesses with heavy debt to reorganize. This is often filed by large corporations, but small businesses and individuals are eligible.

In Chapter 11, the debtor files a proposed plan for profitability after bankruptcy that includes reduced costs and new sources of income while postponing payments to creditors. Chapter 11 can be very costly and time-consuming but allows the debtor to avoid liquidation of the business, provides extra time to file a plan, and offers a chance to reorganize.

Chapter 12Chapter 12 bankruptcy is specifically aims to provide “financial relief for family farmers and fisherman.

When to apply for a loan after filing Chapter 7.

One of our NewCastle team members outlined the Fannie Mae guideline in her article about derogatory credit. The quick answer:

  • Wait for 2-years from your Chapter 7 bankruptcy discharge date.
  • It could be longer (4-years) if you were financially irresponsible.

What counts as financially irresponsible or financial mismanagement? It’s management that, “...deliberately or not, is handled in a way that can be characterized as ‘wrong, bad, careless, inefficient or incompetent’ and that will reflect negatively upon the financial standing of a business or individual.”

I think of financial mismanagement as when people have a pattern of not paying their bills on time, have too many credit inquiries, or max out their credit cards etc.

A sample credit report showing financial irresponsibility includes:

  • Serious delinquency.
  • Time since delinquency is too recent or unknown.
  • Too many inquiries last 12 months.
  • Amount owed on delinquent accounts.
  • Numbers of accounts with delinquency.
  • Level of delinquency on accounts.

When to apply for a loan after filing Chapter 13.

  • 4 years from dismissal date.
  • 2 years after your discharge date.

Lenders use the discharge date, NOT the date the customer filed for bankruptcy.

What if I have filed multiple bankruptcies in the past 7 years?

Per Fannie Mae:

  • Typically, you should wait for 5-years from discharge date before applying for a loan.
  • There could be a 3-year waiting period if extenuating circumstances can be documented.

Other possible problem areas to consider.

CreditIf the above general guidelines give you the “green light” to apply, you will still have to qualify with credit. Credit is also important as you will need to build up your credit score.

Automated underwriting systemAt NewCastle, we use an automated underwriting system that checks each borrower’s situation to see if there are other areas that would prevent a borrower from obtaining a loan. Our team provides this information to you to help you see what your financial picture is from the lender’s point of view with real-time feedback.

Bankruptcies happen.

No matter if you filed for Chapter 7 , 11, or 13, NewCastle offers you a free look to see if you qualify now and also learn what your credit score is. Getting a loan can happen a lot sooner than you think.

The process to see if you qualify for a loan is fast and simple:

  1. Apply online.
  2. Get approved in minutes.
  3. Close fast.

Are you ready to see if you qualify for a loan?

See if you qualify!

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When should I apply for a mortgage after a Chapter 7 or 13 bankruptcy?