Can You Get a Mortgage After Bankruptcy?

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If you’re considering filing for bankruptcy or have already gone through the process, you’re probably wondering how this affects your ability to get a mortgage, and if you can even qualify for one at all. It can be more difficult to get approved for a mortgage after bankruptcy, and there’s likely to be fewer loan programs for you to choose from. But the good news is that, yes, it is possible to qualify for a loan following bankruptcy.

When you apply for a mortgage, you’ll have to meet all the requirements set by your lender. If you apply for a mortgage after bankruptcy, these conditions are more stringent, making the process more challenging. It’s important to understand the specific ways your bankruptcy impacts your ability to get approved for a loan, which financing options will be available to you, and most importantly, the steps you’ll need to take to be in a good position to obtain a loan.

What is Bankruptcy?

Bankruptcy is a legal proceeding resulting from failing to repay your loans and debts. Most often, the bankruptcy process begins when a debtor files a petition. In the court proceeding, a judge examines the liabilities and assets of the person or business whose loans and debts have become more than they can pay.

Depending on several factors, the court can discharge the debts. This means the debtor doesn’t need to pay these debts. The judge may also decide to dismiss the case if the business or individual in question has considerable assets to pay the loan.

More simply, bankruptcy gives people and businesses an opportunity to start over when they are struggling with financial problems, such as high debt.

When filing for bankruptcy as an individual, there are two primary types of filings:

Chapter 7

Chapter 7, commonly known as Liquidation Bankruptcy, discharges almost all unsecured debts of the debtor. If you file for Chapter 7 bankruptcy, the court will issue a temporary stay on your existing loans and debts. This way, the creditor will not be able to foreclose your home, claim for your wages, threaten you, come to collect payments, turn off your utilities, or repossess your property.

The court will consult a bankruptcy trustee for your case and take legal possession of your house. The trustee will be responsible for receiving your assets and finances and evaluating your eligibility to get Chapter 7 bankruptcy. They will sell some of your assets to pay the creditor and set up a meeting with your creditor where the both of you will find common ground.

Chapter 13

Chapter 13, also known as Wage Earner’s Bankruptcy, offers an option to repay the loan for those who have enough income. This option is best for people who find it challenging to deal with the creditors because of their immediate payment and other requirements.

Filers of this type of bankruptcy have a higher chance of keeping their house because you can repay mortgages and loans with the help of a Chapter 13 repayment plan. It allows you to reduce unsecured debts and focus on missed mortgage payments. With this type of bankruptcy filing, you have three to five years to pay your debts using different methods.

How Can Bankruptcy Affect Your Ability to Get a Mortgage Loan?

Bankruptcy can significantly lower your credit score and remain on your credit report for a long time. It can also affect your ability to get credit. Chapter 7 bankruptcy will remain on your credit report for more than 10 years, while Chapter 13 will stay on your credit report for more than seven years. 

However, this doesn’t mean you have to wait that many years to get a mortgage. You only need to wait until after a court discharges or dismisses your bankruptcy to qualify for a loan. The number of years you’ll have to wait is dependent on what type of loan you’re trying to qualify for. It’s also possible to get approved if you meet the waiting period and qualification requirements for your specific loan program.

Mortgage Loans You Could Qualify for After Bankruptcy

To get a mortgage after bankruptcy, you’re not bound to a specific loan program. The key is being able to meet the requirements that each loan type has and figuring out with your lender which option works best for you and the home you’re trying to buy. A few types of mortgage loans you might go with include conventional loans, FHA loans, VA loans, USDA loans, or a non-qualified mortgage loan.

How Can You Qualify for a Mortgage After Bankruptcy?

Whether you have gone through bankruptcy or not, your credit score is the most important thing when it comes to get approved for a mortgage. If you have a good credit score, you can more easily get a loan with a low interest rate. You can also follow these common tips for rebuilding your credit score:

Pay Bills on Time

The best way to improve your credit report, with a bankruptcy or not, is to keep up with your monthly minimum payments. You should also ensure to use less than 30% of your credit limit. Overspending on credit cards and missing payments can lead to financial problems that will make it more difficult to obtain a mortgage.

Avoid Applying for New Debt

Any time you take on new debt it will be recorded on your credit report. Your lender will see this when you apply for a mortgage, and it may lead them to deny your application. This is because if you are paying off other debts, you’re less likely to be able to pay off your mortgage at the same time. To be in good standing and increase your chances of getting a mortgage, it’s best not to take on new debt before or during the process of getting a home loan.

Create a Budget

After bankruptcy, it’s vital to create an appropriate budget to stay on top of your finances. Besides avoiding taking loans, you’ll also need to cut down on extra expenses. Most importantly, when you carry out your budget plan, it will help your credit score start improving.

Save for a Down Payment

If you want to get a mortgage, it’s typically best to save as much as you can for your down payment. There are many benefits of making a larger down payment, including being able to get a better interest rate. Ultimately, the loan program you end up choosing will determine how much you’ll be required to pay for a down payment.

Get a Secured Credit Card

A good way to start re-establishing your credit after bankruptcy is with a secured credit card. This requires you to deposit a certain amount upfront so that the issuer can claim or use it if you aren’t able to pay your bills. You’ll also be able to get your deposit back if you close the account with good standing or upgrade to a regular card.

Write a Letter of Explanation

When applying for a mortgage, it is best to write a letter of explanation to your lender. You can provide details about your current financial condition. You should also include evidence and stats about your income, bankruptcy, and other financial aspects relevant to your situation. Be sure to include the steps you’re taking to improve your credit and pay off debts, as this will show them you’re working to rebuild your creditworthiness. Remember to keep it short and informational so that they can understand your situation.

Stay Active and Responsible

It’s important to maintain a good relationship with your lender when trying to get a mortgage. It’s essential to respond to their inquiries on time. Be honest, cooperative, and be prepared to answer their questions. This will keep the process moving and increase your chances of approval if you meet their requirements.

Bankruptcy can cause financial challenges, but it doesn’t have to be the end of your ability to become a homeowner. If you wait out the designated amount of time and take the necessary steps to improve your finances and credit score, it’s possible to get a loan.

Getting a mortgage after bankruptcy isn’t a journey you have to take on your own. It’s best to hire an experienced bankruptcy lawyer to advise you and help you file for bankruptcy. After that, be sure to work with an experienced lender who can help you through the process.

About the Author: Lyle Solomon has considerable litigation experience, as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California. He now serves as a principal attorney for the Oak View Law Group in California. He has contributed to publications including Entrepreneur, All Business, US Chamber, Finance Magnates, and Next Avenue.