Blemishes on your credit can happen – and bankruptcy or foreclosure can be a particular concern for those hoping to buy a home with a USDA loan.
The good news is that you can get a USDA home loan in the wake of these negative credit events.
Here’s everything you need to know about the USDA waiting periods following a bankruptcy or foreclosure.
USDA Guidelines for Securing a Loan After Bankruptcy
Chapter 7 Bankruptcy and USDA Loans
The most common type of personal bankruptcy, Chapter 7 is often referred to as “straight bankruptcy.” You will liquidate your assets, which might include property, a second car, expensive collections and the like to pay off as many of your debts and creditors as possible.
But just because this happens to be the right option for you doesn’t mean that you are out of luck for a USDA home loan after bankruptcy.
In fact, in most circumstances, the USDA loan bankruptcy waiting period after Chapter 7 bankruptcy is only three years. Here’s how that compares to other common loan types:
|FHA Loan||Two years|
|VA Loan||Two years|
In addition, certain situations might trigger the “USDA Exceptional Circumstances Exception” that allows qualified buyers to move forward faster. The language calls for applicants to “show the bankruptcy was caused by extenuating circumstances beyond their control and has since exhibited a documented ability to manage their financial affairs in a responsible manner for a reasonable period of time following discharge.”Borrowers might also be able to move forward before the three-year mark if they’re able to obtain approval from USDA’s automated underwriting system.
In other words, you may qualify for a USDA loan in as few as 12 months if your bankruptcy was due to something other than financial mismanagement, namely situations that were temporary in nature, such as a job loss or illness, that have since been resolved.
Some lenders may consider these shorter waiting periods, while others will not. Talk with a USDA loan specialist about your specific situation and what might be possible.
It’s also important to understand that a bankruptcy can hurt your credit score, sometimes significantly. Prospective buyers may need to spend some time working to improve their credit profile before pursuing a USDA loan.
Chapter 13 Bankruptcy and USDA Loans
If you have property you want to keep, you may instead consider a Chapter 13 bankruptcy. This means that instead of having to liquidate your property, you are given a repayment plan that will allow you to repay debts over three to five years.
Creditors will stop calling, and you are able to work as usual and pay off your debts, according to the agreed-upon schedule, while keeping your property.
Prospective buyers may be able to obtain a USDA loan just one year removed from filing a Chapter 13 bankruptcy. You’ll typically need an OK from your bankruptcy trustee in order to take on new debt, and lenders may take a closer look at your debt repayment history since filing for bankruptcy.
USDA Guidelines for Foreclosures
If you’ve had trouble paying your mortgage on time on a consistent basis, you may end up with a foreclosure or a deed-in-lieu of foreclosure. That means that your lender takes back your house and then sell it to redeem at least some of the money that you owe them.
Like with bankruptcy, a foreclosure can negatively affect your credit. But it’s possible to still get a USDA loan after a foreclosure – typically three years after the recorded date of the foreclosure.
Homeowners who experience a short sale – where the lender allows you to sell for less than you owe – will typically need to wait two years before pursuing a USDA loan. Guidelines and policies can vary by lender.
Homeowners who experience a foreclosure or short sale on a government-backed mortgage can face additional hurdles. The key is to make sure your “CAIVRS files” are resolved. CAIVRS (which is pronounced “kay-vers” and stands for Credit Alert Interactive Verification Reporting System) is a shared database of defaulted federal debtors that tracks defaults, delinquencies and foreclosures related to federal debts (and not just housing; for example, a student loan could show up) and can limit your ability to get a new USDA loan.
Lenders will run your information through this database when you’re pursuing a government-backed home loan. Generally, you’ll need to provide documentation that any CAIVRS issues have been resolved if your name comes up in the database.
Bankruptcy and Foreclosure a Double Whammy?
Sometimes a bankruptcy and foreclosure go hand in hand. How that will affect your USDA loan depends on which came first.
A homeowner who declares Chapter 7 bankruptcy and fully discharges their mortgage debt will need to wait three years before being able to obtain a USDA loan. Generally, if that home later goes into foreclosure, the borrower won’t be penalized with another three-year seasoning period.
Talk with a USDA loan specialist for more details
Improving Your USDA Loan Chances: Credit Building Tips
A key goal for getting any loan, including a USDA home loan after bankruptcy or foreclosure, is fixing and improving your credit score. However, your credit score doesn't need to be perfect – it is possible to qualify for a USDA loan with bad credit.
Here are four ways you can work toward improving your credit profile:
- Applying for a “secured” credit card: These cards ask for a refundable “security deposit,” upfront; that becomes your spending limit, which prevents you from spending more than you can afford to repay and helps you re-establish credit.
- Making all your payments on time: This is key as most credit agencies weight this component ahead of all others. Signing up for online payments will ensure your check never gets “lost in the mail.”
- Avoiding too many credit inquiries: Limit the number of times you have someone “pull” your credit. That means not succumbing to temptation to open a bunch of new lines of credit.
- Keep balances in check: A good rule of thumb is to keep your individual and cumulative credit card balances at or below 30 percent of your credit limit.
The good news is that a rocky financial past doesn’t mean you can’t get a USDA home loan after bankruptcy or foreclosure. Instead, you can soon be on the path toward homeownership again.