Can You Get a Home Equity Loan After Bankruptcy?
Recovering from bankruptcy can make it feel like your financial options are permanently limited, especially when it comes to borrowing against your home equity. But getting a home equity loan or line of credit (HELOC) after bankruptcy is very possible for those with patience and financial diligence. You’ll need to spend the post-bankruptcy waiting period building sufficient home equity and improving your credit score in order to qualify.
We’ll cover when lenders may approve a home equity loan or HELOC after bankruptcy, how waiting periods work for Chapter 7 versus Chapter 13 filers and what steps can improve your chances of qualifying.
- Yes, you can get a home equity loan or HELOC after bankruptcy. Most lenders require a waiting period of about two to five years after discharge.
- To qualify for a home equity loan after bankruptcy, you’ll need sufficient equity and credit. Many lenders require at least 15% home equity and a minimum credit score of 620.
- If you need funds sooner than home equity loan waiting periods allow, you can consider non-QM home equity loans or a cash-out refinance.
How to get a home equity loan after bankruptcy
Yes, you can get an equity-tapping mortgage after bankruptcy, but you’ll need to manage three factors as you work toward being ready to qualify and handle increased debts once more:
1. Waiting periods
Lenders generally require a waiting period of between two and five years from your bankruptcy discharge before they’ll approve you for a HELOC or home equity loan. But since most lenders have the freedom to set their own waiting periods, it can pay to shop around if you want to take out a HELOC or HEL as soon as possible.
| Chapter 7 bankruptcy | Chapter 13 waiting period | |
|---|---|---|
| Typical waiting period | Three to five years | Two to four years |
If you need the absolute shortest waiting period possible, you may be able to find a nonqualified mortgage (non-QM) lender who’s willing to lend to you after less than two years. However, non-QM loans usually come with higher interest rates and may impose stricter underwriting requirements.
Non-QM loans can come with higher-risk features, so you’ll want to be extremely careful about reviewing all of the loan terms listed in your closing disclosure. (If you’re taking out a HELOC, you’ll get a Truth-in-Lending disclosure instead.)
You don’t always have to wait for discharge. While your repayment plan is active, you’re under bankruptcy court supervision, so the process runs in a specific order:
1. Talk to your bankruptcy attorney first. Confirm your plan payments are current and identify the specific, documented purpose for the funds (necessary home repairs and emergency expenses are far easier to justify than discretionary spending).
2. File a motion to incur debt with the bankruptcy court. The motion should spell out the loan amount, the term, the estimated rate and monthly payment, and why you need the money.
3. Show the new payment won’t impair your plan payments. Document your income and budget so the court can see you have enough room to cover the new monthly payment on top of your trustee payment, mortgage and living expenses. This is where most requests succeed or fail.
4. Obtain your trustee’s non-objection. Many trustees will issue a letter of no objection if you’re current and the loan doesn’t shortchange creditors. Getting that in writing before you shop lenders saves time.
5. Apply with a lender that works with open bankruptcies. Many lenders won’t. Credit unions, portfolio lenders and non-QM lenders are the most likely to consider you, and they’ll want to see the signed court order before closing.
6. Deliver the signed court order to your lender. A lender preapproval means nothing without it — the order is what allows the loan to fund.
Skipping the motion and taking on new secured debt without permission can put your case at risk of dismissal, so never apply before the court signs off.
2. Credit score
Though you’ll typically need at least a 620 credit score to qualify for a home equity loan after bankruptcy, many lenders prefer a score of 660 or higher.
You may be wondering how quickly you can repair your credit after bankruptcy. More than 70% of bankruptcy filers will have a credit score high enough to meet typical home equity loan and HELOC requirements after five years, according to a LendingTree study.
Prioritize paying all your bills on time, as your payment history is the largest factor determining your FICO score. And if you can make on-time payments on all of your debts, you’ll be in an even better financial position once your bankruptcy drops off your credit report (after seven to 10 years, depending on the type of bankruptcy).
Check your credit score for free and receive personalized guidance on improving it with the LendingTree app.
3. Home equity
You usually need at least 15% equity to qualify for a HELOC or home equity loan. Making on-time mortgage payments is the most important thing to build equity, but to boost your equity more quickly, you can also make extra payments as you’re able. Simply switching to biweekly payments can help you build equity without stretching your budget too far.
An alternative to consider: Cash-out refinance
Much like home equity loans and HELOCs, cash-out refinances allow you to convert some of your home equity into cash. The major difference is that a cash-out refinance replaces your current mortgage with a new one. Cash-out waiting periods after bankruptcy can be slightly more forgiving compared to home equity loans and HELOCs:
| Cash-out refinance program | Required waiting periods post-bankruptcy |
| Conventional |
|
| The Federal Housing Administration (FHA) |
|
A bankruptcy on your financial record doesn’t mean you can never borrow against your home equity again. If you’re in the process of recovering from bankruptcy, utilize the waiting period to the best of your ability by concentrating on building equity and raising your credit score so that you can borrow against your home as soon as you’re qualified.
Frequently asked questions
es, in some cases — but you have to follow the court’s process in order. First, talk to your bankruptcy attorney and confirm your plan payments are current. Second, have your attorney file a motion to incur debt with the bankruptcy court that states the loan amount, term and estimated monthly payment, along with the purpose of the funds. Third, show the court a budget proving the new payment won’t impair your ability to keep making plan payments — this is the single biggest factor in whether the motion is granted. Fourth, obtain your Chapter 13 trustee’s approval or written non-objection. Only then should you apply with a lender, and you’ll need one willing to work with an open bankruptcy — many won’t, so credit unions, portfolio lenders and non-QM lenders are your best bets. Your lender will require the signed court order before it can close the loan. If you’d rather avoid the extra steps, most borrowers find it far simpler to wait until their plan is completed and discharged.
Most lenders require a waiting period of about two to four years after a Chapter 13 discharge before approving a home equity loan or HELOC. Because lenders set their own waiting periods, comparing several lenders can help you find the shortest one you qualify for.
Typically, yes. Chapter 13 filers usually face a two- to four-year waiting period, while Chapter 7 filers usually wait three to five years.
You’ll typically need at least a 620 credit score, though many lenders prefer 660 or higher. A LendingTree study found more than 70% of bankruptcy filers have a credit score high enough to meet typical home equity loan and HELOC requirements within five years.
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