Getting a mortgage after bankruptcy: What you need to know

Declaring bankruptcy can be a tough situation, admitting that you’re unable to pay your bills and working on restructuring or discharging your debts. One major concern is whether you can get a mortgage after bankruptcy. While it won’t be easy, it is possible. Let’s explore what you need to know to get a mortgage after bankruptcy.

Can You Get a Mortgage After Bankruptcy?

Yes, you can, but it won’t be a walk in the park. Going bankrupt generally leads to a significant drop in your credit score and a negative mark on your credit report. With bad credit, qualifying for new loans becomes challenging. Additionally, lenders will see the bankruptcy on your credit report when they perform a credit check. However, there is a glimmer of hope.

You won’t be barred indefinitely from getting a mortgage after bankruptcy. After a certain number of years, you can apply for a home loan. If you have a reliable income, have worked on rebuilding your credit, and provide a letter of explanation detailing the reasons for your bankruptcy and improvements made since, lenders might approve you for a mortgage.

How Soon Can You Get a Mortgage After Bankruptcy?

The waiting period to obtain a mortgage after bankruptcy depends on the type of bankruptcy you filed. There are two main types: Chapter 7 and Chapter 13.

Chapter 7 involves liquidating your assets to discharge most or all of your debt. This type of bankruptcy stays on your credit report for seven years. After filing Chapter 7, you may be eligible for different mortgages after specific waiting periods:

  • FHA or VA loan: two years after filing
  • USDA loan: three years after filing
  • Conventional loan: four years after filing
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On the other hand, Chapter 13 bankruptcy involves creating a repayment plan to pay your creditors, usually over three to five years. It stays on your credit report for 10 years. After Chapter 13, the waiting periods are:

  • FHA, VA, or USDA loan: one year from filing
  • Conventional loan: two years after discharge or four years after dismissal

During a Chapter 13 process, you may be able to qualify for a mortgage if you have made 12 months’ worth of on-time payments and receive court approval.

What Type of Mortgage Can You Get After Bankruptcy?

After your bankruptcy has discharged and closed, you may be eligible for different types of mortgages. Conventional mortgages, as well as FHA, VA, or USDA loans, could be within reach if you qualify and meet the waiting period requirements. However, you’ll also need to demonstrate that you’ve worked on repairing your credit.

Most conventional mortgages require a credit score of at least 620. For FHA loans, you’ll need to show an improved credit history and demonstrate that you haven’t taken on additional debt since the bankruptcy. The credit score and down payment amount will affect the interest rate you’re quoted.

How to Apply for a Mortgage After Bankruptcy

Applying for a mortgage after bankruptcy is similar to a regular application but with a few extra steps. Here’s what you need to do:

  1. Rebuild your credit: Use the waiting period to your advantage. Open a secured credit card and make on-time payments to improve your credit score. Pay off balances in full and keep your debt levels low.

  2. Apply for preapproval: Once the waiting period is over, apply for preapproval. Gather proof of income, such as W-2s, pay stubs, or bank statements.

  3. Explain your bankruptcy: Be upfront about your bankruptcy in a letter of explanation. Include any circumstances that led to it, along with the positive changes you’ve made since then.

  4. Be responsive: Be prepared to answer any questions or provide additional information that lenders may request. Be honest and transparent about your financial situation.

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Bottom Line

Bankruptcy shouldn’t prevent you from getting a future mortgage. However, it’s essential to consider the timing and whether you’ll be financially ready to take on new debt. Take your time, rebuild your credit, and when the right moment comes, you’ll be on the road to financial freedom.

Additional reporting by Sean Jackson

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