Can I Get a Mortgage After Bankruptcy?
A bankruptcy on your record can make the loan process lengthier, but there are steps you can take to make home-buying after bankruptcy possible.
Filing for bankruptcy may seem like the ultimate roadblock to applying for a mortgage loan, but that’s not necessarily the case.
While a bankruptcy filing on your record can make the loan process lengthier and more involved, there are key steps you can take to make home buying after bankruptcy possible.
We’ll look into things you need to consider before you pursue a mortgage loan, as well as actionable steps you can take to get you there.
Yes, You Can Get a Mortgage After Bankruptcy
Sometimes, filing for bankruptcy is necessary. Mortgage lenders know this, and they know consumers aren’t always at fault. There is a path forward to getting a mortgage after bankruptcy, though it will require careful steps and being proactive with your financial standing.
Before you choose to pursue buying a home after bankruptcy, there are key factors you’ll want to consider. There’s also plenty of preparation to undergo after bankruptcy to help you along your buying journey.
Important Things to Consider Beforehand
#1. What Type of Bankruptcy You Filed
Knowing what type of bankruptcy you filed is key to keep in mind because the type of filing impacts your period of waiting time to get a mortgage. The most common consumer bankruptcy filings are Chapter 7 and Chapter 13.
Chapter 7 is the most common bankruptcy filing type for non-business entities, typically consumers. People who are unable to repay their debts typically file this type to have their debt written off, allowing them to start from square one from a financial perspective so they can rebuild.
From a lender perspective, mortgage lenders usually set more rigid requirements to get approved for a loan after filing for Chapter 7 bankruptcy.
Chapter 13 bankruptcy differs from Chapter 7 as it involves the creation of a repayment plan for people who are generating income consistently and want to pay their debts. These repayment plans typically last 3 to 5 years, and once the plan is completed, the debts are discharged.
Mortgage lenders may be more favorable towards prospective borrowers who filed for and completed a Chapter 13 bankruptcy since payments were made towards the debt, rather than it being written off.
#2. The Type of Mortgage Loan You Want to Pursue
Knowing what bankruptcy you filed for is one piece of the puzzle. You’ll also want to determine the type of mortgage loan you’ll want to pursue. Different loan types come with unique waiting periods. Understanding these timeframes can help you anticipate your mortgage timeline after filing for bankruptcy.
Chapter 7 Bankruptcy Waiting Periods
- Conventional loans: 4 years from the debt discharge date, or 2 years if there were extenuating circumstances surrounding the bankruptcy filing
- FHA loans: 2 years, or 1 year with extenuating circumstances
- VA loans: 2 years
- USDA loans: 3 years
Chapter 13 Bankruptcy Waiting Periods
- Conventional loans: 2 years from the debt discharge date, 4 years from the dismissal date, or 2 years if there were extenuating circumstances surrounding the bankruptcy filing
- FHA loans: 1 year
- VA loans: 1 year
- USDA loans: 1 year
#3. Non-Qualified Mortgage Loans (or Non-QM Loans)
Technically, you have other options besides traditional mortgage loans. You can look into non-QM loans, which are home loans that are outside of the guidelines established federally for qualified mortgages.
Non-QM mortgage loans tend to offer more risk and be more expensive, offering things like interest-only payments, a balloon payment, or loan terms longer than 30 years. Since there are no standards or requirements for these loans, borrowers must adhere to the lender’s guidelines.
Next Steps You Can Take
Although filing for bankruptcy can allow you to start off with a financial clean slate, it also causes a blow to your credit score. Now that you’re armed with knowledge around your bankruptcy filing type and its impact on future mortgage loans, you’ll want to create a plan of action to set yourself up for success.
Focus On Rebuilding Your Credit
After filing for bankruptcy, you’ll want to take advantage of your financial blank canvas to rebuild your credit. Aiming for a credit score of 580 or higher helps you become eligible for traditional loan options once your waiting periods have elapsed. Rebuilding your credit can take anywhere from 18 to 24 months on average.
Build Your Budget
Having a budget goes hand-in-hand with rebuilding your credit. Opening credit cards and ensuring timely payments is made possible with a clear view into your expenses and income. Getting a grasp and establishing good financial practices helps you be more likely to stay on the path to strong credit.
Prepare a Letter of Explanation
Lenders will view your bankruptcy filing on your credit report as a major red flag. One way to help get ahead of this is writing an explanation letter detailing the circumstances surrounding your bankruptcy, how you’ve improved your finances since the filing, and the steps you’ve taken to demonstrate good financial standing and improvement in your credit. This can help lenders look at the bigger picture rather than focusing solely on the number-crunching.
For more mortgage and home buying insights, visit our blog on RealEstateAgents.com today. Or, begin searching for the best agent to aid you in buying a home and connecting with a lender.
