Getting a Mortgage After Bankruptcy: How To Do It

Getting a mortgage after bankruptcy can be a challenge, but it’s not impossible. Standard loan programs allow borrowers who’ve emerged from bankruptcy to get a mortgage approval after completing a waiting period and meeting other eligibility requirements.

If you’re thinking of homeownership after going through the bankruptcy process, you’ll need to understand how bankruptcy impacts your odds of getting a loan, and which mortgage programs might be the best fit for you.

How long after bankruptcy can I get a mortgage?

You may be able to get a mortgage immediately after a bankruptcy if you can afford the large down payment and high interest rates typically required with non-qualified (non-QM) mortgage programs. However, you’ll need to wait between one and four years after a bankruptcy to get a standard mortgage, such as a conventional, FHA, VA or USDA loan.

The waiting periods for these programs depend on the type of bankruptcy that you filed. Although there are six types of bankruptcy, the most common consumer bankruptcies addressed by lenders are Chapter 7 and Chapter 13 bankruptcies.

Here’s a quick look at the waiting periods for each loan type:

Chapter 7 bankruptcy

Named for Chapter 7 of the Bankruptcy Code, Chapter 7 is the most common non-business bankruptcy filing type. People who don’t have the financial resources to repay their debts often opt for a Chapter 7 filing to discharge the majority of their debt, giving them a clean slate to start their financial lives over.

When you file Chapter 7 bankruptcy, you’ll usually liquidate — sell — many of your assets and use the proceeds to pay your creditors. In some cases you can keep some of your assets such as cars or basic household furnishings, depending on your state’s laws. Mortgage lenders set more stringent guidelines for loan approval after a Chapter 7 bankruptcy.

Chapter 13 bankruptcy

The second most common form of bankruptcy is a Chapter 13 bankruptcy. This form of bankruptcy involves setting up a repayment plan for consumers who have a consistent source of income and a desire to pay their debts.

In Chapter 13 bankruptcy, consumers enter a three- to five-year repayment plan for their debts rather than liquidating their assets. After successfully completing the repayment plan, the debts are discharged. Lenders look more favorably on borrowers who’ve completed a Chapter 13 bankruptcy, because some of the debt is paid, rather than being written completely off.

How long after bankruptcy can I purchase a home?

It’s possible to buy a home the day after completing a bankruptcy, if you have the resources to pay the agreed upon price. If you have a family member willing to gift you funds, have access to a private loan from a friend or relative, or can wrangle up enough down payment funds to get a hard money loan, you could purchase a home immediately after completion of a bankruptcy.

But, while this is theoretically possible, it may not be the likeliest scenario. If you’re using a mortgage to buy a home after bankruptcy, you’ll need to follow the waiting periods that correspond with your loan and bankruptcy type.

Mortgage options after bankruptcy: What you may qualify for

Most lenders offer “bankruptcy home loans,” which are simply mortgages for borrowers with a bankruptcy in their credit history. Be honest about your bankruptcy, and be prepared to provide all of your legal paperwork. Getting a mortgage after bankruptcy isn’t as difficult as you might think, if you know what lenders need ahead of time.

Here’s an overview of the loan options and requirements for mortgage approval after bankruptcy.

CONVENTIONAL LOAN

Conventional (non-government) mortgages follow rules set by Fannie Mae and Freddie Mac — the two government-sponsored agencies that buy and guarantee most mortgages in the U.S. You’ll have to meet more stringent guidelines than government-backed mortgage programs to get a conventional loan after a bankruptcy.

Requirements

• Four-year waiting period since discharge of Chapter 7 bankruptcy or Chapter 13 dismissal
• Two-year waiting period after discharge of Chapter 13 bankruptcy
• Two-year waiting period after discharge if extenuating circumstances are documented
• 620 minimum credit score
• 3% minimum down payment
• Re-established credit

FHA LOAN

An FHA loan is insured by the Federal Housing Administration (FHA), offering more lenient qualifying guidelines for borrowers with low credit scores and small down payments. Once the waiting period requirement is met, the FHA requires borrowers with bankruptcies to show they’ve managed credit responsibly since the bankruptcy.

Requirements

• Two-year standard waiting period
• One-year waiting period for extenuating circumstances
• 580 minimum credit score (500-579 is permitted with a 10% down payment)
• 3.5% minimum down payment (10% if credit score is between 500 and 579)
• Permission from bankruptcy court to apply for a mortgage if still in repayment

VA LOAN

Service members, veterans and their families may be eligible for a loan backed by the U.S. Department of Veterans Affairs (VA). VA loans are traditionally more lenient when it comes to a borrower’s credit history, which can be helpful if you’re trying to get a VA home loan after bankruptcy.

Requirements

• Two-year standard waiting period
• One-year waiting period for extenuating circumstances
• No minimum credit score (though many lenders require a 620 score)
• No minimum down payment required

USDA LOAN

USDA loans are backed by the U.S. Department of Agriculture (USDA) for borrowers purchasing homes in qualifying rural areas. A borrower’s income can’t exceed 115% of the median income for the area. Mortgages are fixed-rate only and have 30-year terms.

Requirements

• Three-year standard waiting period
• Two-year waiting period possible with proof of extenuating circumstances
• No minimum credit score (though many lenders require a 640 score)
• No minimum down payment required
• Income and rural location limits apply

NON-QM LOAN

The term “non-QM loan” refers to home loans that fall outside of the federal guidelines for a qualified mortgage. These mortgages may have risky features, such as interest-only payments, a balloon payment or loan terms longer than 30 years.

Non-QM loans tend to be more expensive and are considered risky to borrowers. There are no standard requirements for non-QM loans, but borrowers must adhere to their lender’s guidelines.

Requirements

• No waiting period in some cases
• Credit score and down payment requirements vary by lender

How to get a mortgage after bankruptcy

• Gather your bankruptcy paperwork. Most lenders require proof of at least your bankruptcy discharge (or dismissal, if applicable) to determine how many years have elapsed since your bankruptcy was completed.
• Be prepared to clean up your credit report. If your credit report still shows you owe money for accounts that were discharged, you may need to provide all of your schedules to show your lender the accounts were included. Although you should limit credit use after a bankruptcy, you’ll also need to show the lender you’ve been able to manage your finances since the bankruptcy discharge. Opening small secured credit cards and paying them off may help demonstrate your ability to manage credit again.
• Determine your discharge or dismissal date. There are a number of dates on bankruptcy paperwork, but the most important one for getting a mortgage after bankruptcy is your discharge or dismissal date. This is the “official” date your bankruptcy was completed, and starts the clock on the waiting period calculation.
• Choose the program you qualify for. Make sure you match up your credit score and waiting period with the right loan program. For example, if your credit score is 600 and it’s been two years since a Chapter 7 bankruptcy discharge, an FHA loan is probably your best bet (if you make too much for a USDA loan or don’t have any military service for a VA loan).
• Shop lenders. Some mortgage companies add extra guidelines for borrowers with a bankruptcy in their credit history. You may need to shop more lenders to find a loan officer with experience originating bankruptcy home loans.
• Provide extra proof you’re ready to repay a mortgage. Be prepared to write letters of explanation, and explain to the underwriter why you’re ready to get a mortgage after a bankruptcy. Lenders may need extra reassurance that the circumstances that led to your bankruptcy won’t repeat and cause you to default on your mortgage.