The mention of a bankruptcy in your past used to leave you with at least 7 years of waiting for a new home. No lender would approve you for a mortgage with this type of history. Fast forward to today and you will see that waiting periods are much shorter. In fact, you can get a USDA mortgage after bankruptcy after just 3 years. There are guidelines you must follow in order to obtain it, but the possibility is there.
Getting a USDA Mortgage After Bankruptcy – Chapter 7
The most common type of bankruptcy is the Chapter 7 BK. This is when you write off most, or all, of your debts. The USDA requires you to wait 3 years after the date of the discharge for this type of BK. There is an exception to the rule, though. If you can prove the BK was not due to your inappropriate use of funds, you may qualify for what the USDA calls the “Exceptional Circumstances Exception.” This occurs when you can prove something other than financial mismanagement. For instance, if you fell ill and were unable to work. If the medical bills buried you financially and you were forced to file for BK, you might qualify for the exception. If you do qualify, you only have to wait 12 months for a USDA loan.
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Getting a USDA Mortgage After Bankruptcy – Chapter 13
Another type of bankruptcy you can file is the Chapter 13 BK. In this case, you don’t write off your debts. Instead, you create a repayment plan to pay the debts. The trustee overseeing your case will handle your payments. You make one monthly payment to the trustee and he distributes the money to the appropriate debtors. The USDA requires you to wait 12 months after filing for Chapter 13 to apply for a new loan. You must provide proof of 12 months’ worth of timely payments of the BK in order to qualify. You must also gain the trustee’s approval to add a new loan to your debts.
Building up Your Credit
The most important thing you can do during the waiting period for your USDA loan is to build up your credit. Most lenders would like to see a credit score of at least 640. If you claimed bankruptcy not that long ago, your score could be significantly lower than 640. The waiting period offers you plenty of time to fix it.
In order to build up your credit, you need to prove that you are worthy. Because many creditors will not want to extend credit to you right away, you may have to start with secured credit. This means you provide the creditor with a down payment equal to your credit limit. For example, if you have a $500 credit limit, you give the creditor $500. They keep this money in an escrow-type account. They do not use the money unless you default on your loan. If you make on-time payments, the deposit remains untouched. In the meantime, the credit card company reports your payments to the credit bureau. Any timely payments help to beef up your score.
Once you have a secured credit card for a while, you can start applying for other types of credit. This could mean unsecured credit cards and/or personal loans – any type of credit which will report to the credit bureaus. No matter the type of credit you take out, make sure you make your payments on time and pay them off as quickly as you can. This can help your credit score to increase faster.
Pay Your Rent on Time
Rent payments may also help you qualify for a USDA loan in the future. As soon as you start renting, make sure you make your payments on time. This can serve as your housing history, which plays an important role in your ability to obtain a new mortgage. The longer rental history you have, the better your chances of approval. Even though rent does not report on your credit report, a lender will look at your housing history. This gives them reassurance that you are able to pay a regular housing payment.
Don’t Overdo It
You must be careful not to overdo it with your new credit. Just because you can obtain new credit does not mean you need to use it. If you do charge something, make sure it is something you can pay off quickly. This shows creditors that you can responsibly use your credit. The worst thing you can do is max out your available credit as this shows irresponsibility with your credit. This may make a USDA lender unwilling to provide you with a new loan.
Obtaining a USDA mortgage after bankruptcy is not as hard as it used to be. In general, you need to make sure you build up your credit. This gives the lender reassurance that you will not have a repeat of what occurred in the past. If you have special circumstances surrounding the reason for your BK, this could help your situation even more. You might still have to wait the 3-year period, but you can use this time to help strengthen your financial situation. The more stable your income and credit, the better able you will be to secure USDA financing. This means a mortgage with no down payment and low-interest rates.