After you go through a bankruptcy, you probably think your chances of securing a mortgage are over. The good news is, you have several options. You may even qualify for an FHA loan or conventional loan. If your credit hasn’t quite bounced back yet or you are still trying to recover from the devastation, you may have to turn to a subprime mortgage.
Don’t worry – subprime loans aren’t what they were years ago. They aren’t the same loans that carry the blame for the housing crisis. Today, a better name for these loans is a non-Qualified or non-QM loan. In other words, the loan doesn’t mean the Qualified Mortgage guidelines. The QM guidelines help prevent lenders from lending to borrowers that may not be able to afford the loan.
Non-QM loans give you a better chance at mortgage approval even after a bankruptcy.
Qualifying for a Non-QM Loan
The key difference in the non-QM loans versus standard loans is the guidelines. You won’t find posted guidelines that pertain to every borrower, as you would for FHA or conventional loans. Non-QM loans are portfolio loans. The lender underwriting the loan also funds it and keeps it on their portfolio. What this means for you is flexible guidelines. For the most part, they don’t have to answer to any government agencies, or at least as much as Qualified Mortgage, lenders must.
Because portfolio lenders set their own guidelines, determining how long your bankruptcy must be discharged or what credit score you need is going to take some research. You have to shop around with different lenders.
It’s likely that you’ll find some lenders that allow a new mortgage just six months after your BK discharge and others that require a 2-3 year waiting period. The overall difference between the lender that allows a mortgage six months after a BK and the lenders that make you wait a few years is the size of the down payment. You’ll likely need a much higher down payment if you are able to sidestep the waiting period. The amount of the required down payment usually equates with the risk level. The closer you are to the BK, the riskier your loan.
The Other Qualifying Factors After a Bankruptcy
As with any loan, you’ll want to put focus on certain factors when trying to apply for a mortgage after a bankruptcy. The most important factors include:
Most lenders look at your credit score first. Make sure it’s as high as you can get it. Just because you filed for BK doesn’t mean you will definitely have a low score. It depends on how you treat your financial life moving forward. Did you pick up the pieces right away? Maybe you applied for a secured credit card to start building your credit up again. If you didn’t, now is the time to do it.
Once you have the secured credit card for a while and continually pay the balance off in full, you can apply for other types of credit. The more credit lines and various types of credit that you have, the better your chances of improving your credit score. This doesn’t mean go out and rack up a bunch of credit all over again. Instead, it means take out a few credit lines, whether revolving or installment and show lenders that you can use them responsibly moving forward.
As is the case for any loan, your employment plays a role in your ability to get a loan. The more stable your income, the less risk you pose to a lender. If something happened to your employment and that is what caused the BK, put it behind you and move forward.
As you get a new job, try keeping that same job. Show future lenders that you can pick up the pieces and not only get a new job, but keep it too. Usually, lenders look for a 2-year employment history, but subprime lenders all have their own requirements, so you may find lenders that don’t require the 2-year history and will accept something shorter.
The largest factor in securing a mortgage approval is your income. This is how you prove to the lender that you can afford the loan moving forward. Directly related to your income is your debt ratio. Lenders will only want to lend you as much mortgage as fits within your debt ratio. Again, because you are looking for a subprime loan, you won’t find posted guidelines. Try to keep your housing ratio and total debt ratio as low as possible though, for the greatest chance at approval.
The best trick when trying to secure a loan after a bankruptcy is to maximize your qualifying factors. Focus on your credit score, employment, income, and debt ratio. See how high you can get your credit score and how low you can get your debt ratio. Once you have things solidified, start shopping for a lender. You can try conventional and government-backed loans first, but if they don’t pan out, you’ll have many subprime loan options to help you.