Mortgages After a Bankruptcy
The Necessity of Non-Qualified Mortgage (Non-QM) Loans
Securing a conventional or government-backed mortgage after bankruptcy is often challenging because these traditional channels enforce mandatory waiting periods following a significant derogatory credit event. The primary function of Non-QM loans is to provide financing solutions for borrowers who are ready to purchase a home but have not met the rigid waiting periods required by Qualified Mortgages (QM). Borrowers looking to get mortgages after a bankruptcy should explore Non-QM Loans.
Non-QM loans generally feature more flexible underwriting standards to compensate for unique financial situations, including past financial issues like bankruptcy. Some Non-QM programs may allow a borrower to qualify with no waiting period after bankruptcy for qualified individuals, enabling quicker re-entry into the housing market.
All Non-QM loans rely on verifying the borrower’s Ability-to-Repay (ATR) the mortgage debt. Non-QM mortgage rates are typically higher than traditional loan rates, reflecting the increased risk assumed by the lender. Once a borrower has re-established sufficient credit history, they may opt to refinance their Non-QM loan into an FHA or Conventional loan to potentially lower their interest rate and monthly payments.
Bankruptcy Classification and Seasoning Requirements
Bankruptcy (BK) is widely considered a Significant Derogatory Credit Event (or Housing Event), inclusive of Chapter 7, Chapter 11, and Chapter 13 filings.
Seasoning requirements vary significantly across different Non-QM programs:
| Non-QM Program | Bankruptcy Seasoning Requirement | Details and Restrictions |
| Prime Non-QM Series | 12 months from discharge or dismissal date. | Bankruptcy is specifically not considered a housing event and is permitted in combination with a housing event. Borrowers under a repayment plan are not eligible. |
| Advantage Standard/Expanded | 2 years seasoning (Max LTV ?80%). | Requires 4 years seasoning if LTV is greater than 80%. |
| Edge Standard | 2 years seasoning. | If seasoned less than 4 years, the borrower must demonstrate 0x30x12 housing payment history. |
| Edge Elite | 4 years seasoning. | An LOE (Letter of Explanation) is required for any recent credit event less than 4 years old. |
| Sharp Standard | ?24 months clean derogatory housing event history. | Sharp Expanded requires ?48 months (4 years) clean history. |
| Horizon Standard/Expanded | ?4 years seasoning required. | Reduced seasoning is permitted with lower LTV: 3 years seasoning allows Max 80% LTV, and 2 years seasoning allows Max 70% LTV. |
| Non-QM Connect | Ineligible if completed (dismissed or discharged) within 4 years preceding the application date. | Borrowers currently in bankruptcy proceedings are also ineligible. Asset Qualifier product requires 5 years seasoning. |
| River Series (DSCR) | 3 years since discharge/dismissal date. | For Investment properties only, DSCR loans require 3 years seasoning since the event. |
Specific Considerations for Bankruptcy Filings
A. Bankruptcy Chapter Details
- Chapter 7, 11, and 13: All chapters of bankruptcy (dismissed or discharged) are included in the definition of a derogatory credit event.
- Chapter 13 Filings: For a Chapter 13 bankruptcy that was discharged, the filing date is used for the lookback period, provided the bankruptcy has been discharged for a minimum of 12 months. If the Chapter 13 bankruptcy was dismissed, the dismissal date is used for the lookback period.
- Active Status: Borrowers who are under the repayment plan of a Bankruptcy are generally not eligible.
- Foreclosure/Surrender: If a property was surrendered during a Chapter 7 bankruptcy, the bankruptcy discharge date is used for seasoning, and the foreclosure action is not required to be fully complete, provided bankruptcy papers show the property was surrendered and the borrower has vacated the property.
B. Multiple Bankruptcies and Documentation
- Multiple Events: Several programs explicitly state that multiple bankruptcies, regardless of seasoning, are ineligible. However, our Advantage program allows multiple bankruptcies with a 4-year seasoning period.
- Documentation Required: A signed written explanation (LOE) from the borrower is required for bankruptcies in the most recent two years. This explanation should establish a credible cause for the event and help us determine if the event was due to extenuating circumstances (factors beyond the borrower’s control, such as a death or major illness of a spouse/child, but typically excluding divorce or job loss) or financial mismanagement.
Impact on Alternative Qualification Methods
Bankruptcy history can affect a borrower’s eligibility for specific non-QM products focused on assets or specialized income types:
- Asset Depletion Loans: While asset depletion loans allow borrowers to use liquid assets to calculate qualifying income, programs like the Sharp Series specifically mark Asset Depletion and Asset Qualifier programs as Not Permissible. Eligibility for Asset Depletion typically requires a strong credit history.
- Credit History Evaluation: When reviewing a loan file, we must analyze the borrower’s credit history. The existence of credit counseling on a file does not automatically preclude financing. Borrowers who have had recent credit events can benefit from Non-QM loans by securing financing without the extended waiting periods, allowing them to take advantage of current market opportunities sooner.
FAQ's
The shortest defined seasoning period is 12 months from the discharge or dismissal date for Chapter 7 or 13 bankruptcies under our Prime Non-QM Series.
No, borrowers who are under the repayment plan of a Bankruptcy are not eligible for our Prime Non-QM Series, and borrowers currently in bankruptcy proceedings are ineligible for Non-QM Connect.
The seasoning requirement for bankruptcy (Chapter 7, 11, or 13) is 2 years when the LTV is 80% or less.
Many Non-QM programs, such as those in our Edge Series, state that Multiple Bankruptcies are ineligible regardless of seasoning.
Yes, homeowners with Non-QM loans can consider refinancing to FHA or Conventional loans to potentially secure a lower interest rate once the negative credit marks fade into the past.
NON-QM Mortgage Rates are normally higher than traditional loan rates because they cater to borrowers with unique financial situations, which poses a greater risk to lenders.
A written explanation must be provided for bankruptcies in the most recent two years, which must establish a credible cause for the event (e.g., extenuating circumstances).
Non-QM mortgages sought one day out of bankruptcy require a 30% down payment.
The seasoning required for a Significant Derogatory Credit Event, including bankruptcy, is 5 years for the Asset Qualifier product.
Non-QM loans are necessary because traditional government and conventional loans require a mandatory waiting period after bankruptcy.
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