In the past, qualifying for a mortgage after a bankruptcy was nearly impossible. Typically after recovering from bankruptcy people ask me how long it will take to qualify for a mortgage loan, refinance, home equity loan, or home improvement loan after bankruptcy or how long after bankruptcy to buy a home. Banks and mortgage lenders understand that it is normal for good people to go through financial hardships and that’s why they extend credit opportunities with new mortgage programs after a bankruptcy. It’s not always easy to find them, but there are a handful of banks and mortgage companies that offer affordable financing to people looking to buy a house after bankruptcy.
How Long After a Bankruptcy Can I Get a Mortgage?
Going through the bankruptcy process can be a daunting and challenging experience, but it doesn’t mean you’ll never be able to buy a house again. With patience, diligence, and a solid financial plan, you can bounce back from bankruptcy and get approved for a mortgage while achieving your dream of homeownership. Let’s consider the timeline for getting a mortgage after bankruptcy and the steps you can take to improve your chances of approval.
Types of Bankruptcy
The first step in understanding the timeline for getting a mortgage after bankruptcy is to determine which type of bankruptcy you filed. The two most common types for individuals are Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy: Also known as “liquidation bankruptcy,” this type typically discharges most unsecured debts. It allows you to start fresh, but it may involve the liquidation of certain assets. This is the most common bankruptcy.
Chapter 13 Bankruptcy: Often called “reorganization bankruptcy,” it involves a repayment plan where you can retain your assets and work to repay your debts over several years.
Waiting Periods for Mortgage Eligibility After a Bankruptcy
The waiting period before you can apply for a mortgage after bankruptcy depends on the type of bankruptcy you filed and the specific mortgage program you’re interested in. Here are some general guidelines:
FHA Mortgage: If you filed for Chapter 7 bankruptcy, you’ll typically need to wait at least two years from the discharge date before you apply for an FHA loan. For Chapter 13 bankruptcy, you might be eligible for a mortgage during the repayment plan, provided you’ve made at least 12 consecutive payments and received court approval. Check up on the FHA minimum credit score requirements today. With extenuating circumstances, these waiting periods may be shorter with FHA loans.
Conventional Home Loan: Conventional mortgages offered by private lenders typically require a waiting period of four years after a Chapter 7 bankruptcy discharge. For Chapter 13 bankruptcy, you may be eligible for a conventional loan two years after discharge or four years after dismissal. Fannie Mae and Freddie Mac define extenuating circumstances as “unforeseen events beyond the borrower’s control that lead to a sudden, substantial, and prolonged decline in income or an overwhelming increase in financial obligations.” If a bankruptcy occurs due to extenuating circumstances, it may lead to a reduced waiting period for various types of mortgage loans being approved after a bankruptcy discharge would traditionally be.
VA Mortgage: Veterans and active-duty service members can often qualify for a VA loan two years after a Chapter 7 bankruptcy discharge or one year into a Chapter 13 repayment plan. There is no minimum credit score with this government financing program.
USDA Mortgage: If you’re interested in a USDA loan, you might be eligible for this type of mortgage three years after a Chapter 7 bankruptcy or one year into a Chapter 13 repayment plan. USDA loans are designed to assist borrowers in rural areas to finance a house, providing them with the advantages of competitive mortgage rates and the opportunity to become a homeowner without making a down payment.
Steps to Improve Your Ability to Be Approved for a Mortgage After a Bankruptcy
While you’re waiting to become eligible for a mortgage after bankruptcy, there are several proactive steps you can take to improve your financial situation and increase your chances of approval:
Rebuild Your Credit: Focus on rebuilding your credit by paying bills on time, reducing outstanding debts, and using credit responsibly. Secured credit cards and small personal loans can help in this process.
Budget Wisely: Create a realistic budget and stick to it. Demonstrating financial responsibility will show lenders that you’re prepared to handle a mortgage.
Save for a Down Payment: Saving for a down payment demonstrates your financial discipline and reduces the amount you need to borrow. The more you can put down, the more favorable your mortgage terms may be.
Seek Housing Counseling: Consider working with a housing counselor who can guide you through the mortgage application process and help you make informed financial decisions.
Monitor Your Credit Report: Regularly check your credit report for errors or inaccuracies. Dispute any discrepancies you find to ensure your credit score is as high as possible.
Shop Around: When you become eligible for a mortgage, shop around and compare offers from different lenders. Each lender may have slightly different requirements and terms.
Take Advantage of Aggressive Mortgage Programs that Help People Buy a Home or Refinance after a Bankruptcy.
In the last 10 years, the American dream of buying your own home turned into a nightmare for too many of us. During the housing crunch, more than seven million homes were foreclosed upon, and many Americans ended up in bankruptcy.
There are many misconceptions in the public about bankruptcy. One of the biggest is that you cannot buy a home for at least seven years after you have declared chapter 7 or chapter 13 bankruptcy. This is not the case at all. It is possible to get a mortgage after bankruptcy if you know where to look.
The most likely reason that this myth persists is that generally, a bankruptcy public record will stay on your credit report for up to seven years. This does not mean that you cannot buy a home again within those seven years.
If you want to buy a house after bankruptcy it is important that you get a plan. If you are ready to jump back in the housing market and recently declared bankruptcy, we would like to offer you these tips and ideas:
As noted above, a bankruptcy can stay on your credit report for up to seven years. This rarely means you are unable to buy a house again fairly soon. Some mortgage lenders are able to approve a client for a new mortgage after a bankruptcy as soon as a month.
However, that is more the exception than the rule. Many lenders will be understandably wary of you with a very recent bankruptcy.
After your bankruptcy is discharged, it is a smart idea to wait at least a year until the dust has settled on your financial situation. The smartest thing you can do during this period is to pay all of your bills and rent on time. When you apply for a home loan after a bankruptcy, home improvement loan after bankruptcy, or home equity loan after bankruptcy, the lender will see the Chapter 7, 11, or 13 reported by the U.S. District Court. But if you have shown for the last year or two that you are back on your feet financially, they may approve your mortgage after a bankruptcy. Even first time home buyers may be able to get qualified to buy a house after a bankruptcy is discharged.
Also note that even with a recent bankruptcy, there are some credit card companies that may approve you for a credit card. Some recently bankrupt clients report that they were still able to be approved for a $500 credit limit Mastercard or Visa. Others may only be able to get a secured credit card, but this can still be used to build your credit.
#2 Save Money Before Applying to Buy a House After a Bankruptcy
With a recent bankruptcy, you will want to show potential lenders that you have money saved up to put down on a house. You do not necessarily have to put down 20% – that is another myth out there – but the more you have, the easier time you will have getting a mortgage after a bankruptcy.
The Federal Housing Administration or FHA offers 3.5% down payment home loans for people who have at least a 620 FICO score. If your score is lower than that, you would likely need to put down up to 10%. One of the most popular programs we hear about is for an FHA loan after the bankruptcy was discharged 24 months. Learn how much of a home you can afford with a FHA loan today.
If you can show that you have skin in the game, it is more likely that a lender will view your file favorably and give you a mortgage.
Another plus of FHA mortgages with low credit scores is that if you are approved by a lender, the interest rate will often be lower than standard market rates. Buying a house with bad credit scores is always challenging so it’s very important that you get advice from financial companies that have access to mortgage programs, like the FHA.
#3 Shop for a Mortgage After a Bankruptcy
One of the biggest mistakes that many potential home buyers make is to not shop around for a mortgage. This is very important always but is especially important when you are coming out a bankruptcy. Many subprime lenders will not want to work with you, but a few companies still may. You have to shop around and find a company that offers a reasonably priced mortgage for people with bad credit. When you are ready to buy a house after bankruptcy, you will most likely be required to provide traditional income documentation, so that means that a stated income loan will be out of the question. If you need a mortgage refinance after a foreclosure reach out to lenders that specialize in these types of refinance loans.
#4 Check Your Credit Report
You can improve your credit more quickly by getting a copy of your credit report. Be sure that everything is accurate. You will have filings on your credit report about debts that were discharged in your bankruptcy. You want to make certain that nothing that was discharged in the bankruptcy is still showing a due balance. This has been known to happen. Most bankruptcies involve a large number of credit accounts. It is possible for something to slip through the cracks.
#5 Try to Get a Car Loan
A great way to rebuild credit is to get an installment loan, which is most often a car loan. You will have to get a car loan with a higher interest rate, but that is ok. We recommend that you get an inexpensive car and make regular payments on the loan for at least a year.
Typically, those regular payments will raise your score and will show a mortgage lender that you are a good risk again.
Takeaway on Getting a Mortgage After a Bankruptcy
Bankruptcy doesn’t mean the end of your homeownership dreams. The waiting period for getting a mortgage after bankruptcy varies depending on the type of bankruptcy and the loan program. While you’re waiting, focus on improving your financial habits, rebuilding your credit, and saving for a down payment. With time and effort, you can increase your chances of qualifying for a mortgage after a bankruptcy and achieving your goal of owning a home once again.