What You Need to Know About Getting a Mortgage After Bankruptcy

The PropertyClub Team
Oct 13th 2020
Bankruptcy can be devastating, but it doesn’t have to ruin your life. It is still possible to qualify for a mortgage after you file for bankruptcy, but you will have to be patient and follow the appropriate steps.

Life happens, and people make mistakes. Sometimes that leads to declaring bankruptcy. If you're thinking of filing for bankruptcy or have already done so, you might be wondering if you can buy a house or get a mortgage after bankruptcy. In short, yes. You can always redeem yourself if you are willing to work hard for the appropriate amount of time. Here is everything you need to know about getting a mortgage after declaring bankruptcy.  

Can You Buy a House After Bankruptcy? 

Bankruptcy doesn’t mean that you can never get a mortgage loan to buy a house again. Time heals all wounds, and eventually, it can be put behind you. However, bankruptcy will seriously impact your credit score and your ability to get a loan. There is no set rule that says you cannot get a mortgage after a bankruptcy. But all lenders have certain minimum requirements for issuing loans, and having a bankruptcy on record is likely to make it difficult to be approved. 

These minimum requirements depend on the lender and the type of bankruptcy. Your chances of approval are better if you’re able to make a higher down payment and accept a higher interest rate on the loan. But even then, there are no guarantees. The best thing to do is to wait for the appropriate amount of time and do what you can to improve your financial situation and work on your credit.

How Long After Bankruptcy Can You Buy a House?

The length of time you must wait after getting approved for a loan depends on the type of bankruptcy and the type of mortgage loan you’re looking to get. There are several types of bankruptcy, but the most common are chapter 7 and chapter 13. Chapter 7 bankruptcy is more severe than chapter 13, and in general, it will take longer to get a mortgage in the case of the former. Conventional loans tend to be the most conservative and require the longest amount of time after a bankruptcy. In comparison, FHA, VA, and USDA loans are more lenient because the government backs them.

Chapter 13 vs Chapter 7 Bankruptcy 

Chapter 7 bankruptcy is the most common type of bankruptcy filing. When you file for chapter 7 bankruptcy, you are declaring that you cannot repay your debts. You will be required to liquidate many or all of your assets to satisfy your creditors. Certain assets may be protected by state law, but most will go toward paying the debt that you owe. Once all your eligible assets have been liquidated, you will be discharged of all debts, and creditors will be forced to leave you alone. However, it will have a severe impact on your credit score, and it will take 10 years for it to be removed.

Chapter 13 bankruptcy is a restructuring or adjustment of debt. When you file for chapter 13 bankruptcy, you are stating that you can pay your debts, but you need more time to do so. Chapter 13 bankruptcy requires the debtor to develop a debt repayment plan over approximately three to five years to satisfy the debt. A court must approve payment plans, and a bankruptcy trustee must be approved to oversee the repayment. Chapter 13 is less severe and doesn’t always require the liquidation of assets – such as a home. It takes 7 years for a chapter 13 bankruptcy to be removed from your credit report.

Buying a House After a Chapter 7 Discharge

Shopping for mortgage loans after chapter 7 bankruptcy can be challenging. Your credit score can drop as much as 200 points, and traditional lenders will require a certain waiting period before you’ll be able to apply for a mortgage loan. Conventional loans typically require you to wait at least four years before applying for a mortgage. USDA loans require three years and FHA and VA loans only require two years. The clock starts ticking as soon as your debt is discharged. That means the moment the court has accepted your bankruptcy plea and relieved you of the responsibilities of repaying the debt.

However, these are basic guidelines and are not set in stone. If you can fork over a sizeable down payment and accept a high interest rate, you may be able to seek approval sooner. Likewise, you can still be denied even if you wait the appropriate amount of time if your credit score has not improved or you’ve shown continued signs of financial recklessness. A lender is never required to approve you for a loan – especially if it’s a conventional loan. But most will be lenient as long as you’ve shown progress, and you’re willing to agree to the terms they’re offering.

Buying a House After a Chapter 13 Discharge 

Getting a mortgage after a Chapter 13 discharge is a bit less difficult, but it’s still not a walk in the park. Lenders are more likely to cut you some slack because you were willing to adjust your debt as opposed to walking away from it. But there are still some limitations that may stand in your way of getting approved for a loan right away.

Most conventional loans will require a grace period of 2 years after the debt is discharged before you can apply for a new mortgage. FHA, VA, and USDA loans all require a year before you can reapply. If your bankruptcy claim is dismissed – meaning the court does not find your repayment plan sufficient and does not order creditors to stop collection – you will be required to wait at least 4 years before applying for a conventional loan.

Keep in mind that with a chapter 13 bankruptcy, the debt is not discharged as quickly as in a chapter 7 bankruptcy – which is why lenders require less time before applying for a loan. In a chapter 13 filing, the plaintiff must complete the repayment plan before the debt is discharged. Whereas in a chapter 7 filing, the debt will be discharged as soon as all available assets are sold. Therefore, it still takes a considerable amount of time to get a loan after first declaring bankruptcy. But the process is quicker once the debt has been officially discharged.

Tips For Getting a Mortgage After Bankruptcy

Here are some tips and things you can do to help you get a mortgage after bankruptcy. Remember that as hard as you work to improve your credit, banks and lenders may still require you to wait a certain amount of time after bankruptcy to get a mortgage. 

Work On Your Credit Score

A bankruptcy itself is not a financial death sentence but failing to learn a lesson and improve is. The best way you can show lenders that you’ve made improvements in your finances is to work on your credit score. There is nothing you can do about the bankruptcy itself until the appropriate amount of time has passed, and you’re able to get it removed from the report. But you can continue to pay your bills on time and stay away from hard inquiries. You may choose to consult a credit repair specialist, but be wary of scams. Rebuilding your credit after something like a bankruptcy will take time, and there are no easy solutions. But if you make good choices and take the proper steps day by day, you’ll see improvements in your score in no time.  

Save Money

The best way to make your mortgage application more attractive to a lender is to pay a larger down payment. The reason lenders are cautious about approving applicants with a bankruptcy on their record is because they pose a more considerable risk of defaulting on the loan than average mortgage shoppers. The more you can mitigate that risk, the more likely you are to be approved for a loan. The ability to save money also shows financial maturity and goes a long way toward proving to a lender that you’re not as risky of a client as you once were. Of course, savings will only go so far, and you may still be denied even if you’re able to put up a hefty down payment. But it will improve your chances if you’re willing to put your money where your mouth is.

Wait For The Right Time  

Timing is everything in real estate. It can make the difference between a profitable investment and a money pit. It doesn’t matter if you’re purchasing a rental property or a home to live in – timing is vital if you want to make a smart investment. This is especially true if you’ve gone through a bankruptcy. Although it may be tempting to apply for a mortgage as soon as you’re able, the reality is that lenders will judge you until you’ve had that mark removed. They may hit you with exorbitant interest rates or include other unfavorable terms that will hurt you in the long run. You’ll likely get a better deal if you can rent or secure housing or some form until you can get your credit back into the normal range. It may take some time, but it’s better to be patient and get a more affordable rate than to jump into a loan you can’t realistically afford and risk going bankrupt a second time.