While it is possible to obtain a mortgage after declaring bankruptcy, it is not easy. Declaring bankruptcy means admitting that you are unable to pay your bills and either restructuring or discharging your current debts, which can result in a significant drop in your credit score and a significant negative point on your credit report. With bad credit, you will struggle to qualify for any new loans.
However, if you can provide lenders with some additional assurance that you can and will repay a mortgage, you may still be able to get a loan.
How Soon Can You Get a Mortgage After Bankruptcy?
Bankruptcy is classified into two types: Chapter 7 and Chapter 13. The first is the most usual, and it entails a liquidation, which means that most or all of your outstanding debt is cancelled. A Chapter 7 bankruptcy is typically accepted for persons with little income who are unable to repay their debts.
A Chapter 13 or reorganization bankruptcy entails developing a plan to repay your creditors using a percentage of your earnings, up to 100 percent of what you owe them. This repayment plan typically takes three to five years to complete and must be approved by a bankruptcy court.
These bankruptcies remain on your credit report for seven and 10 years, respectively, making it difficult to obtain loans.
The good news is that you will not be barred from qualifying for a mortgage indefinitely if you file for bankruptcy. After a certain number of years, you can apply for a home loan and, if you satisfy the conditions, you will most likely be granted.
Chapter 7 bankruptcy
How long you need to wait to get a mortgage depends on the type of mortgage you want to get. Each loan program has a different waiting period:
Leslie Tayne, attorney and founder of Tayne Law Group in Melville, New York, says you’re eligible for a mortgage a few years after a Chapter 7 discharge of debt.
- FHA or VA loan: two years after filing
- USDA loan: three years after filing
- Conventional loan: four years after filing
If you can’t wait it out, Ashley Morgan, a debt and bankruptcy attorney in Herndon, Virginia, says there are limited-availability programs that can allow a Chapter 7 debtor to qualify for FHA financing in as little as one year — “but you have to prove that your debts or financial issues were due to extreme circumstances outside your control,” Morgan says, “such as the death of a spouse or divorce.”
Chapter 13 bankruptcy
The waiting periods following a Chapter 13 bankruptcy are, thankfully, shorter.
- FHA, VA, or USDA loan: one year from filing
- Conventional loan: two years after discharge or four years after dismissal
Tayne explains that a “discharge” happens when you complete your repayment plan laid out by the court and the matter is discharged by the court.
“Dismissal” occurs when you cannot complete the repayment plan and the case is, therefore, dismissed by the court — essentially meaning the bankruptcy was not successful. The waiting periods are shorter for discharges because the filer has been working toward improving their credit through the repayment process.
However, you may qualify for a mortgage during the Chapter 13 process if you can demonstrate that you’ve made 12 months’ worth of on-time payments and get court approval.
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“Here, the court will often want to review the financing terms and compare your monthly mortgage payment to the rent payment list in your bankruptcy,” Morgan says. “If your new monthly mortgage payment would be higher, you usually have to show how you will afford the increased payment and why that money shouldn’t go to creditors.”
Overall, the waiting periods for Chapter 13 aren’t as long as for a Chapter 7 “because the borrower has already taken time to improve their financial situation through the Chapter 13 bankruptcy process, which involves some repayment,” Tayne says.
How to Apply For a Mortgage After Bankruptcy
The experts recommend working hard to bounce back from bankruptcy. That means improving and monitoring your credit before attempting to apply for a loan post-bankruptcy.
To apply for a mortgage after bankruptcy:
1. Check your three credit reports for free at AnnualCreditReport.com, disputing and resolving any errors you spot, and following credit-use best practices.
“Make sure all debts that should be marked as included in your bankruptcy are reporting with zero balances on your credit reports,” Morgan cautions.
Additionally, “focus on making payments on time and as fully as possible. If you’re struggling to rebuild your credit but are getting new credit applications declined, consider opening a secured credit card, which is generally easier to qualify for,” Tayne says.
2. Avoid applying for and taking on too much new debt, and refrain from closing accounts, which can also lower your credit score because it can affect the length of your credit history and credit utilization.
3. If at all possible, look to save. Remember that the larger your down payment saved, the more favorable your interest rate will be.
4. Gather and organize all your bankruptcy discharge and schedule documents, recent pay stubs, two years of tax returns and other paperwork that lenders will want to see proof of.
5. Compare lenders and loan types carefully following the minimum bankruptcy waiting periods. Tayne says some lenders, often smaller ones, are more willing to work with borrowers who went through a bankruptcy, so it pays to shop around for the best mortgage rate.
“Look at rates among as many lenders as you can,” Selita says. “Once your credit is pulled for a loan inquiry, you actually have 30 days to apply for competitive rates without there being any additional negative impact on your credit score.”
After a bankruptcy has discharged and closed, you may be eligible for a conventional mortgage as well as an FHA, VA or USDA loan if you qualify.
“But you’ll need to meet the waiting period rule and show that you’ve worked to repair your credit,” Tayne says.
Most conventional mortgages will require a credit score of at least 620. Your credit score and the amount you’ll be able to commit to a down payment (many lenders prefer 20 percent) will affect the interest rate you are quoted.
For an FHA loan, you’ll need to demonstrate that you have improved your credit and haven’t taken on any additional debt since the bankruptcy.
Tayne says FHA loans “generally require a lower minimum credit score and down payment than conventional mortgages” (as low as 580 and 3.5 percent down, or 500 and 10 percent down). USDA loans can be had for no money down, and there are no minimum credit requirements. Eligible veterans, service members and qualified surviving spouses with a minimum credit score of 620 can apply for a VA loan for no money down.
Can You Recover From Bankruptcies?
Life after bankruptcy can provide a fresh start, but you will also need to rebuild your credit, which has most likely taken a significant damage during the process. The good news is that there are numerous strategies to recover from bankruptcy.
Recovering from bankruptcy isn’t always easy, but here are some pointers to help you get your second chance.
1. Monitor your credit report
After you’ve emerged from bankruptcy, it’s important that you keep an eye on your credit report. The activity on your credit report determines your credit score, so it’s important to monitor it. You can pull your free credit report from AnnualCreditReport.com and compare activity from all three of the main credit bureaus — Equifax, Experian and TransUnion.
Checking your credit report can also help ensure that all the eligible debt included in the bankruptcy is noted as such on the report — rather than hanging out there as an unpaid debt, which could continue to hurt your credit.
Unfortunately, incorrect, negative information showing up on credit reports isn’t uncommon. According to the Federal Trade Commission, around 1 in 5 people have at least one error showing up on their credit report.
If you find any errors or debt that was discharged but has not been recorded as such on your credit report, dispute the information with your creditor. Getting errors off your report can quickly improve your credit.
2. Avoid high-interest products and scams
After you declare bankruptcy, you may find subprime lenders like title loan companies, pawn shops or payday lenders peddling high-interest products to you. Steer clear of them.
Instead, focus on budgeting and money management. If you need money, look to safer sources like borrowing from loved ones. You should also be sure to avoid credit-repair scams.
When credit-repair companies claim they can create a new credit identity or remove your negative credit history for you, stay vigilant — the offer may sound tempting, but it may be a scam.
The Federal Trade Commission has a list of warning signs of credit-repair scams. Specifically, beware if the company does any of the following:
- Requires that you pay up front for credit repair before any service is performed.
- Doesn’t tell you your legal rights.
- Asks you not to contact credit reporting agencies.
- Advises you to dispute information that’s accurate but negative on your credit report.
- Tells you to lie on your application for a loan or credit.
- Claims it can create a new identity for you (for a fee).
Keep in mind that some of the practices mentioned above are illegal, and if you follow through on them, you could face criminal charges resulting in prison or steep fines.
3. Save your bankruptcy paperwork
Once your bankruptcy case is completed, it may be tempting to toss all the paperwork into the trash can to try to forget about it.
However, you may need to provide those documents if, for instance, a collection agency contacts you regarding a debt that was discharged in your bankruptcy case. In those instances, you can provide your bankruptcy paperwork as proof that the debt was discharged. You may also need to provide these documents when you apply for credit accounts, like a mortgage loan.
4. Keep steady with your home and job
After bankruptcy, keeping a stable job and consistent residence is a way to demonstrate to creditors that you are reliable.
Many lenders consider your income and employment history when it comes to providing credit accounts because they want to know if you make enough to repay the loan. Having gaps on your resume may leave an impression with lenders that you could be a risky borrower.
Likewise, consistently living at the same residence might also demonstrate that you could be a reliable borrower. In the eyes of some lenders, it can indicate that you pay your mortgage or rent bill consistently on time and therefore might repay your loans in the same manner.
5. Rebuild your credit
Once your debts are discharged from your bankruptcy case, it may be easier for you to start rebuilding your credit. Paying your bills on time, keeping your credit utilization ratio low and mixing up the types of credit accounts you have can all help.
Know that it’s very possible you will soon see your credit score recovering after bankruptcy. A LendingTree study from 2020 found that among people who had filed for bankruptcy and then sought loan offers on LendingTree the following year, 56% already had credit scores of 640 or higher.
There are different ways to improve the various factors that go into your credit score.
- Make payments on time
Your payment history makes up 35% of your FICO Score. Given how important having a history of consistent on-time payments is, you shouldn’t wait to pay your bills. Let’s say you had a mortgage that was not included in the bankruptcy. Continuing to pay the mortgage on time is very important in rebuilding your financial life after bankruptcy.
You should also be on top of your other bills that are not in the credit report, such as utilities, cellphone bills and medical bills. If they fall too far past due and become delinquent, they could go into collections. The collection account may then end up on your credit report and put a dent in your credit.
If you have a hard time tracking what you owe, consider setting up automatic payments through your bank or possibly using budgeting apps to stay on top of your expenses.
- Keep your balances low
Don’t max out your credit cards. The amount you use of your available credit — known as your “credit utilization ratio” — is part of what determines your credit score (30%). It’s not a good idea to use a lot of your credit limit, even if you pay your monthly credit card bill in full and on time.
As a general rule of thumb, credit experts encourage consumers to keep their balances under 30% of their overall available credit. For example, if you have a credit limit of $500, you should try not to use more than $150 before paying it off.
This is because lenders may consider people with high balances on their credit cards and other revolving debt as risky borrowers. The negative impact on your score magnifies as your credit utilization ratio increases.
- Apply for a credit card
A new credit card after bankruptcy can help you rebuild your credit. But you will likely want to keep your balance low, and you should make sure to pay it off in full and on time each month to avoid being charged interest.
Another option — if you don’t qualify for a traditional credit card — is a secured credit card.
Opening a secured credit card is a proactive measure to rebuild your credit. With a secured card, you’ll use your own money as collateral by paying a refundable deposit to your lender. The amount of your deposit will be your credit limit. The card will then operate like a traditional credit card.
Some credit card companies even allow you to transition from a secured credit card to an unsecured credit card after a certain number of on-time payments or other qualifying factors.
- Increase your credit mix gradually
It’s a good idea to open new accounts in stages as you slowly rebuild your credit. Of the different factors that make up your credit score, new credit inquiries and credit mix each comprise 10%.
For example, let’s say you got a new credit card and use it strategically. As you see your score increasing after showing some payment history, you might consider getting an installment loan next — such as a personal loan, car loan or mortgage — which adds to your credit mix.
However, it may be wise to wait several months or longer to do this, rather than applying immediately after a bankruptcy. Just remember that requesting new credit too frequently can hurt your score, so only apply when you need it.
When it comes to mortgage loans, you may have to wait for a certain period of time before you’re eligible, depending on the type of loan and bankruptcy:
- With a Chapter 7 bankruptcy, you’ll need to wait four years after your debt has been discharged before you can apply for a conventional mortgage loan.
- For a Chapter 13 bankruptcy, the waiting period is just two years.