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Can I Get a Mortgage After Bankruptcy?

Filing for bankruptcy is a serious undertaking some turn to when debt becomes overwhelming. It's an action you can take to relieve some or all of your debt and stop collection activities like lawsuits and repossession—as long as you're willing to pay the substantial price of having this mark on your credit for seven to 10 years, hurting your ability to obtain loans and credit cards.

If you've filed for bankruptcy or are planning to do so in the near future, you may be wondering how it will affect your ability to get a mortgage down the road. Here's the truth:

While it is possible to get a mortgage after bankruptcy, it can be quite challenging.

How Bankruptcy Can Affect Your Ability to Get a Mortgage

Bankruptcy can significantly lower your credit scores, remain on your credit reports and affect your ability to obtain credit, including a mortgage loan, for up to 10 years. Fortunately, its impact lessens over time.

For a lender to even consider you for a mortgage after bankruptcy, your bankruptcy must be discharged. A bankruptcy discharge is a court order that eliminates your debts. In addition to making sure your bankruptcy has been discharged, a lender will look at your credit report to determine your creditworthiness.

It's a good idea to check your credit report before you apply for a home loan to make sure it's accurate. Look for mistakes such as incorrect or outdated information or accounts that were not included in your bankruptcy filing that are listed as part of it. Be sure to contact the credit agency as soon as possible and dispute any errors you find.

When you do begin to apply for a mortgage after bankruptcy, your lender will likely ask you a few questions about your bankruptcy. They may ask you when your case was discharged, what you've done to establish new credit, and how you've been keeping up with your bills. It's a good idea to have the answers to these questions ready beforehand so that the application process runs smoothly.

Let's dive deeper into how each type of bankruptcy can affect your ability to get approved for a mortgage.

Chapter 7: Liquidation

With a Chapter 7 bankruptcy, you'll have to sell your possessions to pay off credit card debt, medical bills, personal loans and other types of unsecured debts. Even though this type of bankruptcy will stay on your credit report for up to 10 years, you may still be able to get a mortgage. You'll need to wait until enough time has passed since your bankruptcy was discharged and make sure you have a substantial down payment and that you've worked on rebuilding your credit history. More on lender-required waiting periods below.

Chapter 11: Reorganization

Chapter 11 bankruptcy is typically used by businesses, but can be filed by individuals as well if they make too much money to qualify for a Chapter 7 filing or have more debt than is allowed in a Chapter 13 bankruptcy. Even for those who do qualify, Chapter 11 is complex and expensive, which is why consumers typically file Chapter 7 or Chapter 13. As long as you've waited long enough after your Chapter 11 bankruptcy has been discharged, you should be eligible to get a mortgage.

Chapter 13: Adjustment of Debts

Chapter 13 bankruptcy can give you the chance to repay all or some of your debts during a repayment period that typically lasts three to five years. The remainder of your debt will be discharged when your repayment period comes to an end.

This type of bankruptcy can stay on your credit report for up to seven years. To get a mortgage after Chapter 13 bankruptcy, you'll need to get permission from your bankruptcy trustee, the person who oversees your repayment plan to creditors.

Types of Mortgage Loans to Consider After Bankruptcy

If you want to try to get a mortgage after bankruptcy, you can research a number of different types of loans. Each mortgage loan has its own unique requirements for bankruptcy filers.

FHA Loans

Federal Housing Administration (FHA) loans are managed by the federal government and may allow you to buy a house with a down payment that's as little as 3.5% of the purchase price. The downfall of FHA loans, however, is that you'll have to pay for mortgage insurance, which will result in higher monthly payments.

To get a mortgage after bankruptcy using an FHA loan, you'll have to adhere to these waiting periods:

  • Chapter 7: Two years from your discharge date
  • Chapter 11: No waiting period
  • Chapter 13: One year from your discharge date

USDA Loans

U.S. Department of Agriculture (USDA) loans are designed for rural borrowers who meet certain income requirements. It may be a good option if you'd like to buy a house in a rural area, have a low or modest income, and aren't eligible for a conventional loan. If you go this route, you may not have to put any money down and you may be able to secure a low interest rate.

Keep these waiting requirements in mind if you're interested in getting a USDA mortgage after bankruptcy:

  • Chapter 7: Three years from your discharge date
  • Chapter 11: No waiting period
  • Chapter 13: One year from your discharge date

VA Loans

If you're a veteran or currently serving in the military, you may be eligible for a Department of Veterans Affairs (VA) loan. A VA loan doesn't require a down payment or charge private mortgage insurance and can give you the chance to lock in a low interest rate. If you pursue a VA loan, however, you'll have to pay a funding fee, which will be a percentage of your home price.

Here are the waiting requirements you should be aware of if you'd like to get a VA loan after bankruptcy:

  • Chapter 7: Two years from your discharge date
  • Chapter 11: No waiting period
  • Chapter 13: One year from your discharge date

Conventional Loans

Since conventional loans are not guaranteed or insured by government agencies, you can expect stricter requirements, such as having a good credit score, if you apply for one. If you get a conventional loan and put down less than 20% of the cost of your new home, you'll need to pay private mortgage insurance.

The waiting requirements for taking out a conventional loan after bankruptcy are as follows:

  • Chapter 7: Four years from your discharge date
  • Chapter 11: Four years from your discharge date
  • Chapter 13: Two years from your discharge date or four years from your dismissal date

How to Get Approved for a Mortgage After Bankruptcy

With all of these types of loans, if your goal is to get approved for a mortgage after bankruptcy, it's a good idea to focus on rebuilding your credit before applying. By doing so, you may increase your chances of getting approved and landing more favorable terms. Here are some tips to help you rebuild your credit:

  • Create a budget: Creating a budget involves calculating your expenses, determining your income, setting savings and debt payoff goals, and recording spending. A budget can help you stay on top of your spending and avoid getting into too much debt.
  • Pay your bills on time: This may seem like a no-brainer, but paying your bills on time is one of the easiest ways to rebuild your credit. Consider automating your payments if you tend to forget when they're due.
  • Get a secured credit card: A secured credit card is typically easy to get and can help your credit as long as you pay your bills on time and in full every month. Make sure the credit card company will report your payments to the credit bureaus (not all secured card issuers do) and show that you are a responsible borrower.

Closing Thoughts

Taking out a mortgage is a large financial undertaking. If you'd like to get a mortgage after bankruptcy, take some time to rebuild your credit and improve your finances first. Once you're confident you can comfortably afford mortgage payments, taxes, and the various other costs associated with owning a home, you can begin your journey to homeownership.

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