It happens to the best of us. You had to file for bankruptcy. Does this mean you are stuck renting for the rest of your life? Luckily, you’re not. There are plenty of opportunities to obtain a mortgage, including the USDA loan.
If living in a rural area appeals to you, read on to see just how long you’ll have to wait to secure a USDA loan.
The Type of Bankruptcy Matters
First, you must determine what type of bankruptcy you filed. There is Chapter 7 and Chapter 13.
Chapter 7 bankruptcy is a write-off of most or all of your debts. It’s like wiping the slate clean. This helps you start over. However, it does pose a risk to lenders. It shows that you got in over your head and had it bail out. Lenders look at this when determining your risk level.
According to the USDA, you must wait at least 3 years from the date of discharge before securing a USDA loan. The discharge date is the date the court officially wiped the slate clean for you.
While 3 years sounds like a long time, it gives you time to pick up the pieces. You’ll need a 640 credit score before you can qualify for the USDA loan. This isn’t going to happen overnight. After you recover from the BK, start rebuilding your credit.
Take your time building your credit up, though. Don’t run out and apply for a bunch of credit cards or personal loans. Instead, apply for one at a time. You might have to start with a secured credit card. Your credit limit on this card will be equal to the amount of the deposit you can make. This lets lenders know that they have collateral should you default on the card.
Once you establish yourself with a secured card, you can start taking out other loans. Make sure you pay the bills on time and don’t let your balances get out of control, though.
Chapter 13 bankruptcy is a restructuring of your debt. In this case, you don’t write debts off through a debt charity. Instead, the treasurer helps you come up with an affordable repayment plan. In this case, you pay your debts back, just not the way originally intended. The treasurer works out a plan with each creditor. He then collects the payments from you and distributes them for you.
The USDA only requires a 12-month waiting period after this type of BK. This is likely because you still make good on your debts. However, your payment history on the bankruptcy plan matters. If you don’t make your payments on time to the treasurer, you won’t be eligible for a USDA loan. In fact, your treasurer has the final say. He must approve your ability to take on another loan while still paying back your BK.
Obtaining a USDA loan right after a Chapter 13 bankruptcy might not be reality for you. Instead, you might have to find ways to build up your credit again. You likely damaged your credit when you stopped making your payments. The fact that you’ve worked out an arrangement with the BK is good, but it doesn’t repair your credit.
You’ll have to do the hard work yourself to get your credit back to where it needs to be.
Other Ways to Make Up for a Bankruptcy
Aside from building up your credit, you’ll have other things you need to do to make yourself look less risky.
Lenders want to see compensating factors. These are other factors in your file that offset the risk of the BK or low credit score. They can be any of the following:
Stable employment – With all of the uncertainty of your credit and late payments, stable employment can help you secure a loan. Staying at the same employer and receiving consistent increases in your income shows the lender that you have some stability in your life.
- Assets – The USDA loan doesn’t require that you have any assets on hand. They don’t even require a down payment. That doesn’t mean that assets can’t help you, though. The more money you have eon hand, the more likely you are to make your mortgage payments. This speaks volumes to a lender.
- Low debt ratio – Since you filed bankruptcy, you had a chance to start over. Take this opportunity to decrease your debts. Don’t get in over your head. The USDA prefers debt ratios around 29/41. The 29% is your housing ratio. The 41% is the total debt ratio. Don’t get in over your head in credit card or personal loan debt.
Each lender will look at your compensating factors differently. Some lenders don’t even accept compensating factors. You’ll have to shop around to find the lender that is most willing to give you the loan you need based on the compensating factors you provide.
Time is the Largest Factor
In all reality, time is the largest factor in your ability to secure a USDA loan after bankruptcy. According to the USDA, you just need to wait 3 years on a Chapter 7 and 12 months after a Chapter 13. But that doesn’t mean you’ll be ready in that time.
Don’t apply for a loan until you are truly ready. Take the time to prepare yourself. Fix your credit, stabilize your income, and save up some assets. This way when you apply for a loan, you’ll show a lender that you are truly ready for the process.
The fact that you have a bankruptcy in your past will always work against you. But over time, its effects will diminish. In the end, you’ll be a stronger applicant after proving that you can overcome such financial obstacles. Of course, it helps if you have an explanation for the downfall. If you lost your job or fell ill, things were outside of your control.
If, however, you just got in over your head, you’ll really have to prove yourself. Take your time and make sure you truly recover. This way when you take out a USDA loan and buy a home, you’ll be in it for the long haul.