How Bankruptcy Impacts Your Ability to Get a Mortgage Loan

Declaring bankruptcy can significantly impact your finances and make it more difficult to qualify for a new mortgage loan. However it is possible to get a mortgage after bankruptcy if you take the right steps to rebuild your credit. This article explains how bankruptcy affects mortgage loans when you can qualify again, and tips for improving your chances.

How Bankruptcy Hurts Your Mortgage Chances

Filing for Chapter 7 or Chapter 13 bankruptcy causes major damage to your credit due to

• Lower Credit Score: Bankruptcy causes a sharp drop in your credit score, often by 100 points or more. This makes it much harder to qualify for a mortgage.

• Negative Mark on Credit Report: Chapter 7 bankruptcy stays on your credit report for up to 10 years. Chapter 13 stays on for up to 7 years. This bankruptcy notation signifies you are a higher credit risk.

• Increased Debt-to-Income Ratio: Eliminating debts through bankruptcy improves your debt-to-income ratio. However, lenders know your debts were forcibly cleared through court order rather than repayment.

• Court Approval Needed: Those in active Chapter 13 bankruptcy must get court approval before taking on new mortgage debt. The court will analyze whether you can truly afford the new payment.

Altogether, these bankruptcy-related credit impacts mean most lenders will automatically decline a new mortgage application in the first few years.

Waiting Periods to Qualify After Bankruptcy

You typically cannot qualify for a new mortgage until your bankruptcy has been discharged and certain waiting periods have passed. The waiting periods depend on your bankruptcy chapter and the type of mortgage you want:

Chapter 7 Bankruptcy

• FHA loan: 2 years
• VA loan: 2 years
• USDA loan: 3 years
• Conventional loan: 4 years

Chapter 13 Bankruptcy

• FHA, VA or USDA loan: 1 year from filing
• Conventional loan: 2 years after discharge or 4 years after dismissal

These waiting periods give you time to reestablish a good payment history and lower credit risk level.

Tips for Getting a Mortgage After Bankruptcy

Though qualifying for a post-bankruptcy mortgage can be challenging, it is possible with the right strategy:

• Wait the full time period. Don’t apply too soon while the bankruptcy wounds are still fresh.

• Rebuild credit score. Use secured cards and flawless payment history to boost your score over time.

• Save for larger downpayment. A 20% or higher downpayment shows lenders you’re committed.

• Choose government-backed loans first. FHA, VA and USDA loans offer more flexibility than conventional mortgages.

• Explain bankruptcy in letter. Detail why you filed and the positive changes you’ve made since.

• Work with manual underwriters. They can override automated declines by considering your full situation.

• Respond promptly to lender requests. Being transparent builds trust in your ability and willingness to repay.

With a patient and diligent effort, you can work your way back into mortgage qualification even after major credit events like bankruptcy. Just focus on letting time pass, improving credit, saving cash, and communicating properly with lenders.

The Impact of Bankruptcy Type on Mortgages

The two main types of personal bankruptcy, Chapter 7 and Chapter 13, have slightly different implications when it comes to qualifying for a future mortgage loan:

Chapter 7 Bankruptcy

• Fast liquidation of assets to pay debts
• Discharge of most debts within 3-6 months
• Assets you keep are exempt or worth little
• Stays on credit report up to 10 years

Mortgage Effects:

• Must wait 2-4 years to qualify again
• Hurts credit score significantly
• Shows inability to repay debts

Chapter 13 Bankruptcy

• Court supervised 3-5 year repayment plan
• Allows you to keep property like homes or cars
• Discharges remaining debts after repayment period
• Stays on credit report up to 7 years

Mortgage Effects:

• Must wait 1-4 years to requalify
• Less credit damage if payments made on time
• If dismissed, waiting periods are longer

Chapter 13 can sometimes allow qualification for a mortgage during the repayment plan if you get court approval. But most filers will still need to wait 1-2 years after completion before a lender will approve them for a new mortgage.

What Types of Mortgages Are Possible After Bankruptcy?

The good news is that both government-backed and conventional mortgage loans are possible after your bankruptcy winds down. Here are some of the most common mortgage products open to you:

• FHA loans – Require just a 580 credit score and 3.5% down payment. Popular after bankruptcy.

• VA loans – No down payment required. Must be eligible veteran or surviving spouse.

• USDA loans – No down payment and flexible credit requirements. Must be in rural area.

• Conventional loans – Typically require 620+ score and 20% down payment after bankruptcy.

• Non-QM loans – Alternative mortgages that allow more flexibility but cost more.

The FHA, VA, and USDA options provide the most lenient credit and down payment guidelines. But a conventional loan may still be within reach a few years after bankruptcy when paired with a larger down payment.

Even during the approval process, be upfront with lenders about your situation. Identify lenders known for manual underwriting that look at your full financial profile. Providing a thorough explanation of the bankruptcy can help reassure lenders you are now committed to healthy money management.

Critical Steps for Securing a Post-Bankruptcy Mortgage

Though every person’s situation is different, in most cases you can get back on the mortgage track after bankruptcy if you follow a strategic credit rebuilding approach:

• Reestablish at least 2-3 open and active credit accounts and make payments flawlessly. Avoid missing payments at all costs.

• Get a secured credit card and use it lightly while paying it off monthly. This shows you can handle revolving credit responsibly again.

• Limit credit applications in the 1-2 years following bankruptcy to avoid too many inquiries. Focus on accounts you have.

• Build up savings for a sufficiently large downpayment based on the type of mortgage you want. Lenders favor big downpayments from recent bankrupts.

• Provide reasonable explanations to lenders detailing the circumstances of your bankruptcy. Take responsibility while highlighting positive changes.

• Consider consulting a credit repair agency for guidance on navigating post-bankruptcy mortgage qualification.

• If declined, find out why and see if the lender will provide steps you can take to improve your application. Then work on those factors.

• Be patient and persistent. It takes diligent effort to offset the mortgage challenges caused by bankruptcy. Stick with the credit rebuilding process.

With the passage of time and prudent financial steps, your credit can gradually heal and make you eligible for mortgage approval again. Stay focused on restoring your score and managing credit wisely.

FAQs About Bankruptcy and Mortgage Loans

How many years after bankruptcy can I buy a house?

• It typically takes a minimum of 2 to 4 years after bankruptcy to qualify for a mortgage, depending on the loan type. FHA loans allow qualification as soon as 2 years post-bankruptcy.

Can I buy a house during Chapter 13 bankruptcy?

• You may be able to buy during active Chapter 13 with court approval. But you’ll need to prove you can afford the new mortgage payment. Most filers wait until 1-2 years after discharge.

What credit score is needed for a mortgage after bankruptcy?

• Requirements vary between lenders, but you can expect to need at least a 620 FICO score for conventional loans. FHA, VA and USDA loans may go down to 580 or lower in some cases.

Do mortgage lenders check for bankruptcy?

• Yes, lenders will see any past bankruptcies when they pull your credit reports. Be upfront about it before they discover it. Providing records can help.

How can I rebuild my credit fast after bankruptcy?

• Getting a secured card and making perfect on-time payments is key. Limit new credit applications and pay down balances. Old negative marks will fade with time.

Can I get a mortgage after a Chapter 7 discharge?

• You can qualify 2-4 years after a Chapter 7 discharge depending on the loan type. Revolving credit should be reestablished for at least one year.

How do I write a mortgage letter of explanation for bankruptcy?

• Explain what led to the bankruptcy, how you’ve financially recovered, and why you are now in a stable position to repay new mortgage debt. Take responsibility while highlighting improvements.

Reestablishing mortgage eligibility after bankruptcy takes diligence across multiple facets of your financial life. But with a prudent approach, homeownership can again be within reach. Be patient, let time pass, and work hard to demonstrate you are mortgage-ready once more.