1099 loan after bankruptcy
Credit Eligibility and Seasoning Requirements
Non-QM programs allow a 1099 loan after bankruptcy, classifying them as Significant Derogatory Credit Events. Eligibility hinges entirely on the seasoning period (the time elapsed since the discharge or dismissal date) and the specific Non-QM program matrix.
A. Bankruptcy Seasoning Periods
While Non-QM loans generally allow financing with no waiting period after bankruptcy for qualified individuals, specific programs impose minimum seasoning requirements:
- Shortest Seasoning: The our Prime Non-QM Series requires a minimum of 12 months seasoning since the discharge or completed date of a Chapter 7 or Chapter 13 bankruptcy.
- Standard Seasoning (our Advantage/Edge): Our Advantage program requires 2 years seasoning if the Loan-to-Value (LTV) is 80% or less, but increases to 4 years seasoning if the LTV is greater than 80%.
- Longer Seasoning (our Connect): Borrowers who completed any chapter of bankruptcy within the four years preceding the application date are ineligible for financing under the Non-QM Connect program.
- Status Ineligibility: Borrowers who are under the repayment plan of a Bankruptcy are not eligible.
B. Multiple Events and Written Explanation
- Multiple Bankruptcies: Many Non-QM programs, including our Edge Series, explicitly state that multiple bankruptcies are ineligible regardless of seasoning.
- Foreclosure in BK: Foreclosures that were included in a bankruptcy filing are generally permitted based on the bankruptcy discharge date, provided the borrower has vacated the property.
- Written Explanation: Housing Events and bankruptcies in the most recent two years must be supported by a signed written explanation from the borrower, detailing the cause and demonstrating that the borrower has the willingness and ability to repay the new mortgage. The explanation must establish a credible cause for the late payments.
Credit Profile and Housing History Requirements
Even after meeting the seasoning period, the borrower must demonstrate re-established financial stability, especially concerning recent housing payments.
- Housing History: For credit events seasoned less than four years, our Edge Standard program requires the borrower to demonstrate a 0x30x12 housing history (no 30-day late payments in the most recent 12 months).
- Credit Re-establishment: All borrowers must have reestablished acceptable credit verified after the credit event.
- Federal Compliance: Regardless of the borrower’s credit history, we must comply with the federal Ability-to-Repay (ATR) rule by determining that the applicant has the capacity to repay the mortgage debt.
1099 Income Documentation Requirements
The self-employed income documentation (1099 Only) used to qualify for the loan must still meet strict stability and verification standards, irrespective of the bankruptcy timeline:
- Employment History: The borrower must have a verified two-year history of earning 1099 income. The borrower must also demonstrate a reasonable expectation that the income will continue for a minimum of three years.
- Documentation: Required documents include the 1099(s) and/or W2(s) for the last two years.
- Transcripts: Wage & Income Transcripts for the year(s) of qualifying income are generally required to verify the 1099 forms.
- Qualifying Income Calculation: The calculation involves taking the gross 1099 earnings and subtracting an expense factor, typically a fixed 10% expense factor (meaning 90% of gross earnings are used as qualifying income).
Financial Trade-Offs
Due to the dual risk profile (non-traditional income documentation combined with recent credit delinquency), the loan terms are generally adjusted to compensate us for the heightened risk:
- Higher Rates: Non-QM Mortgage Rates are normally higher than government and conventional loan rates.
- Down Payment/LTV: Down payment requirements for Non-QM loans typically range from 10% to 30%. The required down payment is directly linked to the borrower’s credit score and the time elapsed since the credit event. For instance, borrowers with credit scores under 660 typically require a 20% down payment (80% LTV).
- Refinancing: Homeowners who initially secure a Non-QM loan post-bankruptcy can later consider refinancing to FHA or conventional loans once they meet the agency waiting periods, potentially securing a lower interest rate.
FAQ's
Bankruptcies (Chapter 7 or 13) require a minimum 12-month seasoning period from the discharged or completed date to the loan application date under our Prime Non-QM Series.
Borrowers who have completed any chapter of bankruptcy (dismissed or discharged) within the four years preceding the application date are not eligible for financing under Non-QM Connect. |
Our Edge Investor Elite program requires 4 years seasoning from the bankruptcy discharge or dismissal date.
No, Multiple Bankruptcies are ineligible regardless of seasoning under many guidelines, including our Edge and our Sharp Series.
The borrower must have a verified two-year history of earning 1099 income in the same industry. Lenders must also have a reasonable expectation that this income will continue for a minimum of three years.
Events seasoned less than four years require the borrower to have 0x30x12 evidenced in the most recent 12 months, meaning no 30-day late payments in the last 12 months.
Housing Events and bankruptcies in the most recent two years require a signed written explanation from the borrower. This explanation must establish a credible cause for the credit issues, determining if they were due to extenuating circumstances.
Foreclosures included in bankruptcy are permitted based on the Bankruptcy discharge date, provided the borrower has vacated the property.
No, borrowers who are under the repayment plan of a Bankruptcy are not eligible. Furthermore, borrowers currently in bankruptcy proceedings (any chapter, dismissed or discharged) are explicitly not eligible for financing under the Non-QM Connect program.
Non-QM loans are necessary because government and conventional loans impose a mandatory waiting period after bankruptcy, whereas Non-QM loans offer flexibility and often no waiting period for qualified individuals.
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