A Guide to Qualifying for a Mortgage After Bankruptcy

After facing bankruptcy, one’s finances and credit take a significant blow, making future transactions difficult. Due to the low score on your credit report after bankruptcy, you will likely need help with applying for big loans like mortgages. But is it impossible? 

A person who has undergone bankruptcy can apply for a mortgage and even get good options with the right strategies. This post will discuss what loan types you can qualify for a mortgage after bankruptcy, how to improve your chances of approval, and more.

What happens after bankruptcy? 

Declaring bankruptcy gives a person a new lease of life, as the process wipes out all their outstanding debt obligations. However, that badly impacts their credit score, which makes it challenging to qualify for unsecured loans with low-interest rates. 

Besides the credit score, many mortgage lenders find people with bankruptcy status unreliable. They do not trust that such borrowers can make on-time payments. So, they tend to have stricter eligibility criteria for mortgages after bankruptcy.

It is also worth mentioning that mortgage lenders typically treat the two bankruptcy types differently. First, let’s refresh on what they are: 

Chapter 7 Bankruptcy Chapter 13 Bankruptcy 
Type Liquidation Reorganization 
What is payable?All debt is cleared after the debtors sell all their assets to creditors. Debtors must settle part of or the total debt to their creditors in installments with a revised repayment plan. They can keep their valuable assets. 
Discharge period3-4 months (approx)Discharge is possible after completing all scheduled payments. 

Those filing for Chapter 7 bankruptcy get more strict treatment than Chapter 13 bankruptcy filers. This is because people with Chapter 13 bankruptcy are those with a regular income who can settle at least some of their outstanding debt. This means these people can pay off mortgage payments if they get a mortgage loan. 

People who file for Chapter 7 bankruptcy are typically those who have exhausted all other debt relief methods, leaving only asset liquidation as a last resort. This implies that they are less responsible for making on-time payments and are riskier to trust with a big loan. 

Can I get a mortgage after going bankrupt?

You can get a home loan after filing for bankruptcy and the discharge date. The bankruptcy filing status will appear in the credit report for some years, so it is best to try it after a specific waiting period passes. After that, you can qualify for a home loan with a down payment and interest rate structure similar to someone with no prior debt. However, it varies from situation to situation. 

Types of Mortgages Available to Individuals with a Bankruptcy History

The following are the mortgage loans that people can qualify for after undergoing full bankruptcy. 

FHA Loans 

FHA loans or Federal Housing Administration loans are available under the control of the government and are best for people with low credit history or first-time home buyers. The credit score and down payment criteria are more flexible with FHA loans than conventional loans. Since these are government-backed loans, the lenders get their support and protection if their debtors default. 

Conventional Home Loans 

Mortgage companies or banks offer conventional mortgage loans to individuals. So, conventional loan types are private loans without governmental control. Many of these loans go to the Federal Home Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage Association (Fannie Mae). 

A conventional loan is suitable for people with moderate to high credit scores and a stable income since providing a down payment is compulsory. Plus, the borrower must possess Private Mortgage insurance as well. This is until the overall property equity grows to 20% of the original loan amount. 

USDA Home Loans 

A United States Department of Agriculture loan or USDA loan is suitable for people living in rural areas who want to buy a property. For USDA loans, there is no need to make a down payment, and the interest rates are also low. 

VA Home Loans 

VA loans, or Veterans Affairs loans, are available to veterans under the jurisdiction of the Department of Veterans Affairs. Borrowers with a VA loan do not have to make any down payments on the property. Plus, this home loan type has no credit score restriction. 

Expected Waiting Period for Mortgage After Bankruptcy

Borrowers typically need some time to stabilize their financial condition and income after bankruptcy. So, lenders find it more reassuring if borrowers go through a waiting period before buying a home after bankruptcy. During this waiting period, they have time to improve their credit score and obtain stable income. This way, they can assure lenders that they will have the ability to pay off the mortgage payments later. 

Different loan types have their own waiting periods, starting from the time of bankruptcy discharge. Plus, the waiting periods are longer for people who have previously undergone foreclosure or multiple bankruptcies. 

Here are the waiting periods for different home loan types. 

FHA loan:

  • Chapter 7 bankruptcy filers– 2 years in general; 1 year for borrowers with extenuating circumstances.
  • Chapter 13 bankruptcy filters– 1 year.

Conventional loan:

  • Chapter 7 bankruptcy filers– 4 years in general; 2 years for borrowers with extenuating circumstances. 
  • Chapter 13 bankruptcy filters– 2 years following the bankruptcy discharge date, 4 years following the dismissal date, and 2 years for borrowers with extenuating circumstances. 

USDA loan:

  • Chapter 7 bankruptcy filers– 3 years. 
  • Chapter 13 bankruptcy filters– 1 year.

VA loan:

  • Chapter 7 bankruptcy filers– 2 years. 
  • Chapter 13 bankruptcy filters– 1 year. 

Tips for Increasing Your Chances of Qualifying for a Mortgage

The following are helpful steps you can take to improve your chances for mortgage approval after filing for bankruptcy. 

Recheck your credit report. 

It would help if you opted for a free credit report and carefully reviewed the details. If there are any errors, like wrong late payment information, in your credit history, you will find them after a thorough review. Then, you should file a dispute with the respective credit bureau to fix the error in your report. 

Try to get a rapid rescore. 

Typically, it takes quite some time for one’s credit score to increase after they start trying. You can try out a rapid rescore to see the improved score in your credit report and get a mortgage immediately. 

The three main credit bureaus, like Experian, allow lenders to submit their documented proof of any recent changes to their credit accounts to them. Then, the bureaus update the borrower’s credit score per the new details. The rapid rescore is a free service for lenders; as a borrower, you must pay a certain amount to request it.

Save for a more substantial down payment. 

You can start saving up money to put towards the down payment of a house. Aim to save more money for this and get satisfactory loan terms. Plus, if you manage to save a lot, this will show your commitment level to the mortgage lender. 

Make timely payments.

You should pay the existing bills on time to avoid falling into debt again. Stay consistent with this to slowly improve your credit score during the waiting period after bankruptcy discharge. 

Take steps in your life that will help you maintain consistency. For example, if you have a busy schedule and keep forgetting to make payments on time, you can activate automatic payments from your account.

Prepare and follow a suitable budget.

You need to have reasonable control over your spending to maintain a healthy financial lifestyle. With time, you might fall into deep debt again, further harming your credit score. You should carefully review your current spending pattern, expenses, etc., and compare it with your monthly income. Understand which are expenses that you genuinely need and which are luxuries. 

Then, plan a realistic budget for yourself to save money and slowly improve your financial situation. Follow it consistently to make it a habit. When you manage your income and expenses well, you can make monthly mortgage payments easily without compromising on your lifestyle.

Check different lenders. 

Some lenders set separate eligibility criteria for home loans for post-bankruptcy applicants. So, when you get a rejection from any lender, keep hope. You should check different options and contact multiple lenders until you find one person to accept your application. 

Get professional support.

You should contact experts on real estate laws, mortgages, and loans. Some have specialized experience working with borrowers who want a mortgage after bankruptcy. They can give you proper tips on available loans, their requirements, and other details. 

For example, they may suggest you compose a straightforward letter of explanation to the mortgage lender you want to contact. Explain what led to your bankruptcy status and your steps since then to improve your finances. Some lenders like the transparency and may extend an offer to you. 

Get a co-signer.

You can get a co-signer with a strong credit score and a stable income to apply for a mortgage with you. Their name on your mortgage application will improve your chances of qualifying.

Since lenders hold the co-signer responsible when the borrower fails their payment, the risk for them is high. Unless you personally know someone with a high credit score who will agree to become a co-signer, you will find it difficult to get one. 

Getting new credit following bankruptcy: how hard is it?

There is a common misconception that getting new credit is extremely difficult after filing for bankruptcy. However, that is not the case. After getting a Chapter 7 bankruptcy discharge, all the leftover unsecured debt will vanish. So, if you get any new loans, you can ideally pay off the new payments on time due to reduced pressure. 

Yet, the bankruptcy filing notification will stay on your credit report for around 7 to 10 years. Thus, you will get fewer attractive loan offers. You might also fall into revolving debt if you do not manage your scheduled payments better. So, get a stable monthly income before you apply for new credit, like a mortgage after bankruptcy.

About The Author: 

Lyle Solomon has extensive legal experience, in-depth knowledge, and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a principal attorney.

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