By Gayle SatoCan I Get a Mortgage After Bankruptcy?
Quick Answer
You can get a mortgage after bankruptcy, but be prepared to wait until you’re eligible to apply. You can use the waiting period to rebuild your credit and finances.
When debt becomes overwhelming, bankruptcy can offer relief and protection from collection activities. But, bankruptcy also affects your credit and can add complications when you're trying to get a home loan.
You can get a mortgage after bankruptcy, but first you may need to wait for a period of time and take steps to rebuild your credit. The process varies depending on the type of bankruptcy and the type of mortgage involved. Here's what to know before you apply.
Can You Buy a House After Bankruptcy?
You can buy a house after bankruptcy, but you'll have to clear a few hurdles if you need to get approved for a mortgage. The two main challenges are rebuilding your credit and finances, and getting through any waiting period your lender may require.
Getting Your Finances and Credit in Shape
Bankruptcy is both a cause and a symptom of financial difficulty. A bankruptcy on your credit report can be a red flag for lenders. It can also bring your credit score down substantially (if late or missed payments haven't done so already). At the same time, bankruptcy is often the result of serious financial challenges like lost income or medical debt.
To qualify for a mortgage—and position yourself for successful homeownership—you'll need to get both your credit and finances into fighting shape. Ideally, you need a down payment, emergency savings, reliable income and a track record of paying bills on time. You'll also need a credit score that qualifies you for a loan.
Waiting It Out
Lenders typically don't consider your mortgage application until your bankruptcy has been discharged, which eliminates your eligible debts. Additionally, you may need to wait for a period of time after discharge before you apply for a loan. Some government-backed loans don't have waiting periods, but most loans require you to wait one to four years, depending on the type of loan and type of bankruptcy in play.
How Long After Bankruptcy Can You Get a Mortgage?
Your time frame depends first on the type of bankruptcy you've filed. The table below shows the waiting periods on conventional and government-backed loans for both types of personal bankruptcy.
| Bankruptcy Type | Conventional Loans | FHA or VA Loans | USDA Loans |
|---|---|---|---|
| Chapter 13 | Two years from discharge date or four years from dismissal | One year from discharge date | One year from discharge date |
| Chapter 7 | Four years from discharge date | Two years from discharge date | Three years from discharge date |
What Types of Mortgage Can You Apply for After Bankruptcy?
You can choose to apply for any type of mortgage, including a conventional mortgage, Federal Housing Authority (FHA) loan, Veterans Affairs (VA) loan or U.S. Department of Agriculture (USDA) loan. Each type has its own advantages and disadvantages. Here's a closer look.
Conventional Mortgages
Conventional loans are the most common type of mortgage. They're available from banks, credit unions and other financial institutions in a range of loan terms, loan sizes and fixed or adjustable rates.
Conventional mortgage requirements can vary considerably from loan to loan. However, credit score requirements are generally stricter for conventional mortgages than for loans (such as FHA or VA loans) guaranteed by the government. Conventional loans also require you to wait as long as four years after discharge before applying.
FHA Loans
An FHA loan may offer several advantages over conventional loans. First, the waiting periods are shorter. Second, an FHA loan may further shorten your timeline by offering low credit score and down payment requirements. You'll need a minimum credit score of 500 with a 10% down payment (580 if you have a 3.5% down payment) to qualify for an FHA loan. With these lower down payments, you'll pay for private mortgage insurance (PMI). However, despite the forgiving credit score requirements, your interest rate should be lower than for a subprime loan.
VA Loan
VA loans are available for active service members, veterans and their families. VA loans don't require a down payment or PMI, and interest rates are typically lower than they would be on a conventional loan. However, VA loans do charge a funding fee of up to 3.3% of your home's price to help cover the cost of the program. The waiting periods for VA loans are the same as for FHA loans.
USDA Loan
The USDA offers direct and guaranteed home loans designed to help home buyers with less-than-perfect credit and lower-than-average incomes. To be eligible, you must buy a home in a rural or suburban area that fits USDA guidelines. USDA loans may not require a down payment, and low interest rates (or subsidized payments) can help make your monthly payments more affordable.
How to Apply for a Mortgage After Bankruptcy
To improve your chances of success, here are a few tips to prepare you for the mortgage application process post-bankruptcy.
1. Reset Your Finances
Let bankruptcy be a motivator to reset your finances and meet new goals. Before you begin applying for mortgages, start by budgeting and saving money in an emergency fund. Save toward your down payment as well, and avoid racking up debt. Managing your money effectively makes a good impression on lenders and helps you meet down payment and debt-to-income ratio requirements.
2. Rebuild Your Credit
While you're working toward financial goals, make it a goal to improve your credit as well. You can review the information in your credit reports from all three credit reporting agencies—Experian, TransUnion and Equifax—at AnnualCreditReport.com. You can also get your Experian credit report for free anytime.
If you manage your credit wisely, the impact of a bankruptcy on your credit score will naturally diminish over time. Chapter 13 bankruptcies fall off your credit report seven years after the date they were filed; Chapter 7 bankruptcies after 10 years.
3. Write a Letter of Explanation
Lenders are often concerned about the risks of lending to someone who's filed for bankruptcy. Make your case by writing a letter of explanation that details the circumstances that led to your bankruptcy and the steps you've taken since to get your finances and credit back on track.
4. Get Preapproved
Going through the loan approval process before you start shopping for a home gives you extra time to find the right lender, develop options, determine how much loan you can afford and answer any questions your lender has upfront. Once you're preapproved for a loan, you can shop with confidence—and reassure sellers that your offer is secured.
The Bottom Line
Getting a mortgage after bankruptcy can take extra time and effort. But, for many, buying a home is a marker of financial recovery and a worthy goal for your life post-bankruptcy. If you want a little extra help keeping an eye on your credit, consider Experian's free credit monitoring service. You'll get anytime access to your Experian credit score and report, and receive alerts whenever there are changes to your credit file.
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About the author
Gayle Sato
Gayle Sato writes about financial services and personal financial wellness, with a special focus on how digital transformation is changing our relationship with money. As a business and health writer for more than two decades, she has covered the shift from traditional money management to a world of instant, invisible payments and on-the-fly mobile security apps.
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