Chapter 7 is the most common type of bankruptcy and is used by many families and individuals to put themselves back on a path to financial stability. Many people are able to retain their primary residence during their bankruptcy and want to refinance to lower their interest rate or use some of their equity for home repairs after discharge. Others may be tired of renting and can now afford to purchase a new home. This leads us to one of the most common questions we receive.
What mortgage options do I have after completing a Chapter 7 Bankruptcy?
Mortgage options are very limited until 2 years have passed after your Chapter 7 discharge. These options are even more limited if your loan amount is over the conforming loan limit for your county, also called the conventional loan limit, as your loan is then considered a jumbo loan. This is especially true in states with higher home values such as California, New York, Washington State, Oregon, Massachusetts, and Colorado. We refer to this situation as the jumbo loan after bankruptcy program gap.
What is the Jumbo loan after bankruptcy program gap?
This is a loan program gap that many lenders and borrowers do not know exists. The gap is this, government backed loan programs such as FHA allow for a client to obtain a mortgage 2 years after a chapter 7 discharge; however, if the borrowers’ loan amount exceeds the FHA loan limit then a Portfolio jumbo loan or a VA loan becomes the only options available. Most jumbo loan programs require that 7-10 years pass after a bankruptcy discharge therefore the Portfolio Jumbo Loan may be preferred.
Further, a conventional loan or a loan backed by Fannie Mae, is not available until 4 years after discharge. This only leaves Portfolio and VA loans that can offer a potential option for people in this situation. VA loans do not have a set loan limit by county as conventional and FHA loans do. If you are a veteran or active duty military and you live in a high home value state such as California, VA may be a solid option. If you are not VA eligible then your only option is likely a Portfolio Loan.
What is a jumbo loan?
A mortgage over the conforming loan limit for the county in which the subject property is located. These limits are determined by the Federal Housing Finance Agency (FHFA) for conventional loans and by HUD for FHA loans. Check your County loan limits.
Jumbo loans are loans that are not backed by a government entity and instead are backed by a private institution, which in turn, are able to create their own guidelines for qualification. Generally, jumbo loans have more strict qualifying requirements, including a 7-10 year waiting period from bankruptcy discharge before being able to obtain a new mortgage. This is quite strict and closes the door on many people post-bankruptcy from being able to refinance or purchase a new home using jumbo financing.
Fortunately, some lenders have seen this gap in loan programs as an opportunity and have started to offer Portfolio jumbo loans specifically for folks who had a past financial hardship. These Portfolio loans may be the only and best option.
Is a Portfolio loan a good option for me?
The answer to this depends on your unique qualifying criteria and your goals. If there is a loan that meets your goals now, then it is likely a good option. Waiting for 7-10 years is not a good option for most people as life goes on after bankruptcy and most people are ready to look into homeownership or an updated mortgage option after being discharged from bankruptcy.
Not all portfolio loans will work, but there are several lenders who have programs that will work and allow you to take action now. These programs do generally come with slightly higher interest rates and fees. There are several tiers of programs which vary based on different criteria and some of the programs can be fairly competitive with standard jumbo loans. Click here for more info: Peoples Bank Portfolio Loans.
Take Your First Step and Consult with our Mortgage Consultants
Our team can help explain the different home loan programs that are available to you if you are above the FHA and conventional loan limits. Additionally, we will outline their corresponding down payment requirements. After helping thousands of individuals and families across the country, we have developed the knowledge and experience to help you navigate a path to your goal of owning a home after bankruptcy.