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You Can Get a Mortgage After Bankruptcy if You Know the Rules

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Getting a mortgage after bankruptcy can be a challenge, but it’s not impossible. Many lenders have established guidelines for borrowers who’ve emerged from bankruptcy, completed a waiting period and met other eligibility requirements.

If you’d like to buy a home after going through the bankruptcy process, it’s important to understand how bankruptcy impacts your ability to get a home loan, and which mortgage programs are available to you.

What is bankruptcy?

Bankruptcy is the legal process through which consumers and businesses experiencing financial hardship can receive debt relief. The process involves either selling assets to repay the debt or creating an alternative repayment plan. Bankruptcy is often considered a last-resort option.

There are six types of bankruptcy, but we’ll focus on the two most common forms of bankruptcy available to consumers: Chapter 7 and Chapter 13.

Chapter 7 bankruptcy

The most common form of bankruptcy for individuals is Chapter 7 — also known as liquidation or straight bankruptcy. This form of bankruptcy is typically used by people who don’t have the financial resources to repay their debts.

When you file Chapter 7 bankruptcy, you’ll have to liquidate — sell — many of your assets and use the proceeds to pay your creditors. You may be able to keep some assets, depending on your state’s laws, such as cars or basic household furnishings. Chapter 7 bankruptcy essentially allows you to make a fresh start by releasing you from all dischargeable debts.

Chapter 13 bankruptcy

Another type of bankruptcy used by consumers is Chapter 13 bankruptcy. This form of bankruptcy is designed for consumers who have a consistent source of income and a desire to pay their debts.

In Chapter 13 bankruptcy, consumers enter a repayment plan for their debts rather than surrendering property. After successfully completing the repayment plan — which ranges from three to five years — the debts are discharged. Under this form of bankruptcy, you may be able to keep a valuable asset, such as your home.

How to get a mortgage after bankruptcy

Getting a home loan after bankruptcy is possible, but it will require patience on your part. You’ll also need to take steps to increase your chances of mortgage approval after bankruptcy.

A bankruptcy will lower your credit score significantly — which signals to creditors that you are a lending risk. And it will impact your score for years to come. A Chapter 7 bankruptcy remains on your credit report for up to 10 years, while a Chapter 13 remains for up to seven years.

While you don’t need to wait for a bankruptcy to disappear from your credit report to get a mortgage, you must adhere to a waiting period before applying. How long you’ll have to wait depends on the type of bankruptcy you file, as well as the type of mortgage you plan to get. If extenuating circumstances are present — such as a divorce, job loss, illness, death of a primary earner or other unforeseeable events — you may qualify for a home loan sooner.

Here’s a brief overview of how long you’ll need to wait to apply for a mortgage after Chapter 7 and Chapter 13 bankruptcy.

Loan Type Chapter 7 Bankruptcy  Chapter 13 Bankruptcy
Conventional 4 years (2 years with extenuating circumstances) 2 years from discharge date;

4 years from dismissal date (2 years with extenuating circumstances)

FHA 2 years (1 year with extenuating circumstances) 1 year
VA 2 years 1 year
USDA 3 years 1 year
Non-QM No waiting period No waiting period

Mortgage options after bankruptcy

Consumers have multiple options for so-called bankruptcy home loans. Once you’ve satisfied the waiting period, your next step is to find a lender willing to work with borrowers who have a bankruptcy in their credit history. Fortunately, this isn’t as difficult as you may think.

Here’s an overview of the loan options and requirements for mortgage approval after bankruptcy.

Conventional loan

Conventional (non-government) mortgages follow guidelines established by Fannie Mae and Freddie Mac — the two main agencies that buy and guarantee most mortgages in the U.S. Conventional loans have either a fixed- or adjustable interest rate, and terms typically range from 10 to 30 years.

Getting approved for a conventional mortgage after bankruptcy requires meeting the appropriate waiting period and demonstrating that you’ve reestablished your credit. This means paying your bills on time and keeping low balances on revolving credit accounts.

Requirements
  • Two- to four-year waiting period
  • 620 minimum credit score
  • 3% minimum down payment

FHA loan

An FHA loan is a mortgage insured by the Federal Housing Administration. These loans typically offer lending requirements that are more flexible than conventional mortgages. FHA loans are available for 15- or 30-year terms, and rates may be fixed or adjustable.

Once the waiting period requirement is met, the FHA requires borrowers with bankruptcies to reestablish good credit or choose not to incur any new debts after the bankruptcy. Consumers who file Chapter 13 will also need to get permission from the bankruptcy court to secure a mortgage.

Requirements
  • One- to two-year waiting period
  • 580 minimum credit score (500–579 is permitted with a 10% down payment)
  • 3.5% minimum down payment (10% if credit score is between 500 and 579)

VA loan

Service members, veterans and their families may be eligible for a loan backed by the U.S. Department of Veterans Affairs (VA).

VA loans are traditionally more lenient when it comes to a borrower’s credit history, which can be helpful if you’re trying to get a VA home loan after bankruptcy.

Requirements
  • One- to two-year waiting period
  • No minimum credit score (though many lenders require a 620 score)
  • No minimum down payment required

USDA loan

USDA loans are backed by the U.S. Department of Agriculture (USDA) for borrowers purchasing homes in qualifying rural areas. A borrower’s income can’t exceed 115% of the median income for the area. Mortgages are fixed-rate only and have 30-year terms.

Requirements
  • Two- to three-year waiting period
  • No minimum credit score (though many lenders require a 640 score)
  • No minimum down payment required

Non-QM loan

Another option for consumers looking to get a mortgage after bankruptcy is to apply for a non-qualified mortgage (non-QM) loan. This is an umbrella term for home loans that fall outside of the federal guidelines for a qualified mortgage. These mortgages may have risky features, such as interest-only payments, a balloon payment or loan terms longer than 30 years. Additionally, they may permit a higher debt-to-income (DTI) ratio than qualified mortgages.

Non-QM loans tend to be more expensive and are considered risky to borrowers. There are no standard requirements for non-QM loans, but borrowers must adhere to their lender’s guidelines. Often borrowers can secure a non-QM loan immediately after bankruptcy, provided they can meet the down payment and other requirements.

Requirements
  • No waiting period in some cases
  • Credit score and down payment requirements vary by lender

Tips to earn a mortgage approval after bankruptcy

If you’re trying to get a mortgage after bankruptcy, the first thing you’ll need to do is get your credit score back on track. There’s no quick fix for rebuilding your credit after a bankruptcy, but your most recent actions have a more significant impact on your credit score than past negative events.

Keep these tips in mind to help your chances at mortgage approval.

Focus on improving your credit. Do what you can to improve your credit before applying for a mortgage after bankruptcy. Your credit score would’ve taken a hit, but you can improve it by paying your bills on time and keeping your credit utilization low. If you plan on getting a mortgage after a Chapter 13 bankruptcy, it’s crucial to follow your repayment plan as agreed.

Your credit score will play a significant role in your loan costs. Here’s a quick look at how a difference in credit score can impact a $250,000 conventional loan with a 30-year term.

Credit score APR Monthly payment (principal and interest)  Interest paid Total loan cost over 30 years 
740 2.84% $1,033 $121,722 $371,722
620 4.207% $1,224 $190,483 $440,483

As the table illustrates, a 740 credit score can save you more than $68,000 over the life of a 30-year loan.

Apply for credit cautiously. While you may qualify for other forms of debt, such as credit cards or an auto loan, soon after bankruptcy, be cautious about taking on additional debt if you anticipate applying for a mortgage.

When you apply for credit, potential lenders check your credit, creating a hard inquiry on your credit report. Hard inquiries can negatively affect your credit score, although the impact varies from person to person based on your unique credit history. Opening several new loans or lines of credit within a short time frame can indicate that you’re having money troubles, and that can cause a greater hit to your score. Additionally, new debt will increase your DTI ratio and can hurt your loan approval chances.

Save up as much as you can. Putting as much down as possible or having adequate cash reserves can offset a high interest rate and increase your approval chances. You may also choose to pay for mortgage points to lower your interest rate.

Consider waiting to apply. While you may be within the time frame to get a mortgage after bankruptcy, you may want to consider letting even more time go by. Remember, a bankruptcy remains on your credit report for seven to 10 years. While you don’t have to wait for the bankruptcy to be completely gone, the more distance you put between the bankruptcy and your mortgage application, the better. It will give your credit history time to heal and your credit score some time to bounce up.

FAQs: Getting a mortgage after bankruptcy

Can bankruptcy get rid of my mortgage debt?

Chapter 7 bankruptcy will likely eliminate your mortgage debt, but this means you’ll have to give up your home unless it qualifies for an exemption. Your lender still has the right to foreclose on the home to recover as much of the original mortgage amount as possible.

With Chapter 13 bankruptcy, you’re able to retain assets like your home. You’ll have a new plan in place to repay your debt. Just be sure you’re making on-time payments, or you’ll put yourself at risk of foreclosure.

What happens to a second mortgage during bankruptcy?

In a Chapter 7 bankruptcy filing, your second mortgage probably won’t be discharged, which means you’re still responsible for repaying it, and the lender can foreclose on your home to get paid.

A Chapter 13 bankruptcy allows for “lien stripping,” which removes junior liens on your home. Since your first mortgage takes priority, you may be able to have the debt from your second mortgage discharged — once you complete your repayment plan — and have the second mortgage lien removed. This could be especially helpful if your home is underwater.

Are there exceptions to the waiting period when getting a mortgage after bankruptcy?

If you experience extenuating circumstances, such as a job loss, illness or death of the primary owner, your lender may shorten the waiting period.

What’s the difference between a bankruptcy filing date and a discharge date?

The filing date is the day you file a petition with your local bankruptcy court. The discharge date is the day you’re no longer liable for the debts included in your bankruptcy. This date could be a few months after the filing date or several years later, depending on whether you file Chapter 7 or 13.

 

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