Understanding USDA Home Loans and Bankruptcy Eligibility
You can still buy a house after a bankruptcy.
USDA
home loans are an excellent way to achieve homeownership. When
filing for Chapter 13 bankruptcy, a debtor is given the opportunity
to develop a repayment plan for any outstanding debts. You will lose
your opportunity to obtain a USDA loan if you fail to make timely
settlements to the trustee.
After one year, you can apply for a USDA loan, assuming that the
trustee grants you permission to do so while still making payments
on your Chapter 13 bankruptcy debts.
Bankruptcy is a legal process that helps individuals and businesses
eliminate or repay their debts. Under Chapter 7 of the U.S.
Bankruptcy Code, bankruptcy filers can eliminate most of their debts
by selling off their assets.
However, there is a waiting period before you can qualify for a USDA
loan after filing for Chapter 7 bankruptcy. This waiting period is
three years from the discharge date of the bankruptcy. During this
time, you must re-establish good credit and demonstrate an ability
to repay the loan.
The following are the top five reasons for declaring bankruptcy:
- Divorce or Separation
- Job Loss
- Medical Expenses
- Credit is being used improperly or excessively.
- Floods, casualty losses, thefts, and other unanticipated expenses are examples of unexpected expenses.
If a borrower has successfully rebuilt their credit worthiness
and has met the requirements of the USDA mortgage after bankruptcy,
they may be able to finance a house with a USDA mortgage after
filing for bankruptcy.
Consumer bankruptcy may be classified into two types: Chapter 7 and
Chapter 13 bankruptcy. It is determined by the kind of bankruptcy
that a borrower meets the requirements for obtaining a USDA home
loan.
Waiting period for USDA Chapter 7 bankruptcy
Most, if not all, of the debt that is discharged in a Chapter 7
bankruptcy filing is discharged by the bankruptcy court.
In accordance with USDA loan requirements, a potential borrower will be
permitted to get a USDA mortgage when a three-year waiting period
has passed.
It may, however, be feasible to reduce the waiting period by using
the automated underwriting software provided by the lender. If
you're not acquainted with
automated underwriting, it is a process
in which lenders employ software to examine a borrower's application
at the beginning of the process. The program examines the borrower's
credit record (including credit built after bankruptcy discharge),
income, assets, and other financial information, among other things.
Depending on how the software is feeling on any given day, it may be
feasible to gain permission from the program.
Waiting period for USDA Chapter 13 bankruptcy
Chapter
13 bankruptcy permits the debtor to create a repayment plan for any
past-due debts and obligations.
After this sort of bankruptcy, the USDA merely requires a 12-month
waiting period before resuming operations. Your payment history
under the bankruptcy plan, on the other hand, is quite important.
If you are unable to make timely payments to the USDA loan trustee,
your USDA loan eligibility will be cancelled.
Your trustee is the final arbiter in the matter. He or she must give
you permission to apply for a USDA home loan while still making
payments on your Chapter 13 bankruptcy repayment plan.
Reestablish your credit profile
You've paid off your debts or negotiated payment arrangements, and you've decided to put your money toward the purchase of a home. What are you going to do now?It is critical that you complete the actions outlined below to demonstrate to lenders that your prior difficulties are behind you. As a result, I would want you to complete the following:
Pay your bills on time
Given that your payment history accounts for 35% of your credit score computation, making on-time payments is critical when it comes to restoring your credit after going through a financial crisis. Remember to keep up with other commitments, such as utility payments, as part of maintaining a regular and on-time payment schedule, because they may also contribute to the improvement of your credit score through programs such as Experian Boost.
Instead of using a credit card, pay with cash.
One of the most significant hazards connected with declaring bankruptcy is relapsing into the same bad behaviors that got you into problems in the first place. Make every effort to avoid using your credit cards for any purchases, to the maximum extent possible.
Maintain a low balance on your credit cards.
The amount of outstanding debt you have accounts for 30 percent of your total credit score computation, according to TransUnion. Maintaining a bare minimum of credit card debt is therefore essential for reestablishing credit after filing for bankruptcy. Make an effort to decrease your credit card usage, and make it a priority to pay off the amounts on your cards on a regular basis in order to accomplish this goal.
Save for emergencies.
Try to put money aside for an emergency savings account to meet unforeseen expenses such as auto repairs and medical bills if at all feasible. If you do this, you will be better able to avoid incurring additional debt, which will prevent your credit rehabilitation efforts from stalling or even reversing.
Obtain a Secured Credit Card
Following a bankruptcy filing, making sure you don't abuse your
credit cards may be a good first step in rebuilding your credit
after bankruptcy. While using secured credit cards responsibly, you
may be able to reestablish your reputation as a reliable borrower in
the eyes of financial institutions.
The organization that issues the secured credit card will require
you to deposit money with them and then borrow money from them in
order for you to be approved for one. The interest rates on these
cards are often high, but if they report to all three credit
bureaus, they may be an effective tool for demonstrating to lenders
that you are responsible with your money until you can acquire a
conventional credit card with better terms and conditions.
You may even be given the chance to "upgrade" to an unsecured credit
card if you complete all of your payments on time and without
incurring any penalties with your secured credit card. Because of
this, you will not be required to apply for a new credit card in the
event that your credit score increases. This is excellent news for
you.
It is essential to know that applying for a secured card does not guarantee acceptance; as a result, before applying for one, spend some time reading the requirements of the issuer. If at all feasible, choose a provider that helps you to evaluate whether or not you are likely to qualify before consenting to a comprehensive credit check that can further harm your credit score and reputation.
Consider a credit-building loan.
It is also possible to improve your credit without having to
apply for a typical loan by taking advantage of credit builder
loans, which are available online.
Inability to pay back the money is not a prerequisite for receiving
the loan money. The financial organizations such as banks and credit
unions that offer credit-building loans require customers to hold a
specific amount of money in an insured savings account or
certificate of deposit in their name for a set period of time in
order to construct a credit history. Following that, the borrower
makes monthly payments that include interest until the loan is
totally paid off.
The fact that you have a savings account with your bank may also
make it feasible for you to apply for and be approved for a secured
loan, which allows you to borrow against the money you already have
on hand. In the case of a traditional loan, your financial
institution will record your loan repayments to the three major
credit bureaus, just as it would with a regular loan. This may, in
the long run, help you increase your total score.
How long does it take to get your credit back after bankruptcy?
In most cases, it takes 12-18 months after filing for bankruptcy to rebuild your credit profile, providing that you follow all of the necessary steps to restore your credit. Following the prescribed measures, the great majority of individuals will notice some improvement after one or two years if they stick with it.
An uncorrected bankruptcy will remain on your credit report unless the bankruptcy was documented in an unprofessional manner.
Conclusion
The Chapter 7 and Chapter 13 bankruptcy proceedings erase the
majority, if not all, of the debt that was filed with the bankruptcy
court in the first instance. In order of importance, the following
are the top five reasons for filing for bankruptcy: Divorce or
separation, job loss, medical expenditures, excessive or poor use of
credit, and unanticipated expenses are all reasons to file for
bankruptcy.
The USDA mortgage may be available to potential home purchasers
after they have declared bankruptcy if they meet the conditions of
the waiting period and have successfully restored their credit
worthiness. This is true regardless of the reason for the
bankruptcy.
SOURCE: USDA Chapter 10: Credit Analysis
Recommended Reading
- How do USDA Loans work? The annual fees and PMI explained
- What is Earnest Money on a USDA Loan?
- How a USDA Loan Gift Funds Can Help You Buy a House