USDA Loan FAQs: Is Bankruptcy an Obstacle

Here at our loan agency, questions about past bankruptcies come up periodically. Our customers assume that a past bankruptcy or other past financial struggles prevent them from qualifying for a USDA Home Loan.  What’s more alarming is that many potential home buyers are under the false assumption that because of these past financial mistakes, they will never be able to fulfill their dream of homeownership.

In reality, nothing could be further from the truth. The beauty about a USDA loan is that a past bankruptcy does not have to stand as a looming roadblock on your path to fulfilling your dream of homeownership. In fact, if you have made a concerted effort to repair your past credit problems, you may qualify for a loan today.

Of course, there is an approval process – with the major keys following a bankruptcy being that you are reestablishing your credit, you are making timely payments on current financial responsibilities, and you have a stable income.

Other criteria following bankruptcies include:

  • Chapter 7 Bankruptcy: A minimum of two years must have elapsed since the closing of the bankruptcy.  The borrower must also meet the trade line requirements.  Debts retained in the bankruptcy are eligible provided that they have a paid as agreed rating.
  • Chapter 13 Bankruptcy: Borrower must be in the payment plan for a minimum of 1 year with all payments made as agreed.  If the borrower is still in bankruptcy, court permission is required.  Cash outs with cash going to borrower are not allowed however the borrower can pay off junior liens and the bankruptcy itself while still in the 13.  Manual underwriting is allowed.  Manual guidelines apply.
So yes, even though there may be a 24 month period following some bankruptcies, the key to remember is that the dream of homeownership is still in reach for everyone.  That is why it is so important to never assume that you do not qualify. Instead, if you have any questions, or even just want more information, please contact us today.
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