How Soon Can I Get a Mortgage After Bankruptcy?

Getting a Mortgage After Bankruptcy

People get a home after bankruptcy

Bankruptcy can seem like the end of the world, or at least the end of some big dreams, like owning a home. But the fact is, you may be able to qualify for a mortgage as soon as a year after your bankruptcy is discharged.

While mortgage waiting periods vary by type of mortgage and type of bankruptcy, repairing your credit and getting your financial footing back are key to getting a mortgage that works for you.

That said, the ins and outs of getting a mortgage after bankruptcy can be confusing. Besides the variety of mortgages available and their different rules, there are also different types of bankruptcy.

And then, there’s you. What led to your bankruptcy, how have you dealt with your finances since then and what are you willing to do going forward?

Everyone’s situation is different, but the best way to get on solid footing and get a mortgage is understanding how it works and where you fit in.

While there is a waiting period after a bankruptcy is discharged before you can apply for a mortgage, it doesn’t mean you have to wait to do the work that’ll get you there.

Bankruptcy means a mortgage may cost you more in interest rates, but there’s also good news. Repairing your credit and increasing your credit score after bankruptcy can ease the pain and get you your dream house.

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Why Is There a Waiting Period for Mortgages After Bankruptcy?

It’s an unavoidable truth that a bankruptcy, whatever the reason, tells a lender the person filing had trouble paying their bills. It’s that simple. Lenders want to make sure that someone who had to take that devastating financial step is now a good risk. A mortgage is a lot of money that takes a long time to pay back. Lenders aren’t punishing people for filing bankruptcy, they just want to make sure they’re a good financial bet.

That means that the first obstacle to owning a home after bankruptcy is dealing with the waiting period (you may also see it called a seasoning period). This is an opportunity for you to show lenders you’ve used that time well to restructure your finances and rebuild your credit. You’ve shown you can make payments on time and live up to your end of the deal.

Look at the waiting period as a chance to show that bankruptcy doesn’t define you, but that you’re someone who’s taken a bad financial situation and turned it around. You’re someone committed to managing a budget and making payments.

There are three kinds of personal bankruptcy, Chapter 7 and Chapter 13 make up 99.9% of bankruptcies. Chapter 11 is sometimes, though rarely, used by individuals for bankruptcy. Waiting periods differ for each one.

Chapter 7 Bankruptcy

Those filing Chapter 7 must sell their assets to pay off unsecured debt, like credit card debt, medical bills and personal loans.

In Chapter 7 bankruptcy, FHA and VA mortgage regulations require a two-year waiting period from the time of bankruptcy discharge – the point the court released you from your debts – not from the time you filed. A Chapter 7 discharge usually takes 6-8 months from the day you file.

Those applying for a USDA loan are eligible three years after discharge and conventional loans require a four-year waiting period.

A Chapter 7 bankruptcy stays on your credit report for 10 years.

All of the time periods may be less if there are extenuating circumstances that led to the bankruptcy. In other words, circumstances beyond your control. More about that later.

Chapter 13 Bankruptcy

Getting a FHA, VA or USDA loan after Chapter 13 bankruptcy, is more complicated than after a Chapter 7.  A Chapter 13 bankruptcy also takes longer to discharge. Chapter 13 allows you to make payments to some or all of your creditors over a period of three to five years. Your remaining debt is discharged once those payments are made. It stays on your credit report for  a period of seven years.

The waiting period for getting an FHA mortgage after Chapter 13 bankruptcy is two years. It requires permission from the bankruptcy trustee – the person who oversees the creditor repayment plan – as well as proof of on-time payments on the bankruptcy plan.

With a USDA loan, the waiting period is 12 months of successful plan payments.

There is a two-year waiting period for a conventional loan. If the Chapter 13 case is dismissed – meaning the bankruptcy plan wasn’t followed — the waiting period is four years.

All of these, like Chapter 7 bankruptcy, can be shorter if there are extenuating circumstances that led to the bankruptcy.

Chapter 11 Bankruptcy

While it’s rare for an individual to file Chapter 11 bankruptcy, which is a reorganization plan usually used by businesses, it is occasionally an option for those who make more money than what’s allowed with Chapter 7, but have too much debt to qualify for Chapter 13.

Someone who files for Chapter 11 bankruptcy can apply for a mortgage any time after the bankruptcy is discharged. The bankruptcy process is expensive and involved, though, which may outweigh the shorter waiting period.

Loan Cost Comparison

The interest rates for a mortgage loan after bankruptcy vary, depending on the loan as well as the borrower’s credit score. A bankruptcy can knock as much as 200 points off your credit score if you score was good before the bankruptcy.

This chart compares interest rates, showing how they vary with credit scores:

FHA 680 – 3.73% 620 – 4.92%
VA 760 – 3.33% 640 – 4.37%
USDA 700 – 3.55% 620 – 4.92%
Conventional 740 – 3.55% 640 – 4.37%

What Are FHA Loans?

FHA loans are mortgages backed by the Federal Housing Authority, designed for people who may have trouble getting a conventional loan because of a poor credit history or income. FHA loans have easier credit requirements and lower down payments.

Since the U.S. government backs the loans, lending institutions are more willing to offer them to applicants with poor credit scores.

A FICO score of 620 could qualify for an FHA loan, though applicants with lower scores may also qualify if they are willing to pay a higher interest rate and make a bigger down payment.

The waiting period to get an FHA loan after a bankruptcy without extenuating circumstances is:

  • Chapter 7 — Two years from the time of discharge (not the time of filing).
  • Chapter 13 — Two years if plan payments have been made on time and the trustee of the bankruptcy gives an OK.

What Are Conventional Loans?

Conventional loans are those originated by banks, credit unions and online lending sources.

They are not guaranteed by the government, but they typically have the best interest rates and terms, which means lower monthly payments. The most common type of conventional mortgage is 30-year fixed-rate, which accounted for 90% of mortgages in 2019, according to federal mortgage backer Freddie Mac.

Conventional loans require a credit score of 620 or higher. The higher the score, the better the terms. One of the biggest advantages is that a down payment of 20% of the cost of the house means you don’t have to pay private mortgage insurance, which can add thousands to a mortgage.

Even if you don’t put down 20% at the closing, once the equity in the house reaches 20%, the PMI is dropped. With an FHA loan, it never drops, and you have to pay a one-time up-front premium of 1.75% of the base amount of the loan.

The waiting period for a conventional loan after bankruptcy is:

  • Chapter 7 – Four years after discharge date
  • Chapter 13 – Two years. If the case is dismissed, which happens when the person filing for bankruptcy doesn’t follow the plan, it’s four years.

What Are VA Loans?

The VA loan program, administered by the U.S. Department of Veterans Affairs, offers low-cost loans to veterans and active military personnel. Qualified borrowers aren’t required to make down payments, and some of the closing costs are forgiven and they don’t have to pay mortgage insurance.

There are several requirements for those who have gone through a bankruptcy if they want to get a VA loan.

Chapter 7

  • No late payments since the bankruptcy filing;
  • No derogatory credit (collections) since the bankruptcy;
  • A minimum median credit score of 530-640 (based on where they live);
  • Two year waiting period after discharge.

Chapter 13

  • A minimum 12 months wait from bankruptcy initiation date;
  • A satisfactory performance of the bankruptcy repayment plan;
  • No late payments after the date of the 341 (meeting of creditors and bankruptcy trustee);
  • The trustee or court must approve any new debt if the borrower is still in bankruptcy;
  • The borrower must have no derogatory credit (collections) from the date of filing for bankruptcy;
  • The borrower must have a minimum credit score of 530-640 (based on where they live and lender guidelines).

What Are USDA Loans?

USDA loans are backed by the U.S. Department of Agriculture for low and middle-income borrowers who may not qualify for a conventional loan. The mortgages have low down payments and no closing costs for those who buy a home in a qualifying rural area, which includes about 97% of the U.S. A borrower’s income can’t exceed 115% of the median income for the area. Mortgages are 30-year, fixed-rate.

USDA loans require a minimum credit score of 640.

Waiting period for applicants who have filed for bankruptcy:

  • Chapter 7 – Eligible three years after discharge.
  • Chapter 13 – Eligible after 12 months if they’ve stuck to their plan payments.

How Foreclosure Prolongs a Mortgage Waiting Period

Sometimes a bankruptcy isn’t the only financial setback a potential mortgage borrower is dealing with. The bankruptcy may have been preceded by foreclosure on a mortgage.

Having both a foreclosure and bankruptcy may prolong the mortgage process more than just a bankruptcy, and may add other requirements.

The following chart shows the length of time after a foreclosure a potential borrower may apply for a loan:

FHA 3 years
VA 2 years
USDA 3 years
Conventional
  • 2 years from discharge date
  • 4 years from dismissal date
  • 7 years in all other cases

Extenuating Circumstances

A bankruptcy may result from something you never saw coming, a one-time event that caused a big loss of income and/or increase in financial obligations and was beyond your control. The most common are job layoffs, medical emergencies and divorces. The important thing to remember is “beyond your control” – losing a big chunk of money to an investment or an out-of-control Amazon buying habit, or some other financial choice you made that sends your finances careening, doesn’t count. You have to be able to demonstrate that you could not avoid the circumstances that led you to file for bankruptcy.

When a bankruptcy results from extenuating circumstances, it can mean a shorter waiting period on all types of mortgage loans.

The waiting periods are:

  • FHA, VA, USDA – One year after discharge;
  • Conventional – Two years after discharge.

Steps to Improve Your Credit Scores after Bankruptcy

There’s one thing that’s true when applying for a mortgage, whether it comes after a bankruptcy or not – credit score is king. The better the score is, the quicker you will be approved for a loan and the lower the interest rate will be. The interest rate makes a huge difference in your monthly bill as well as how much you pay over that 30 years.

The fastest way to repair your credit for a mortgage after bankruptcy is to make on-time payments on all debt, (especially credit cards) and to keep the amount you use to less than 30% of the credit limit, which is known as the credit utilization rate.

These two factors – payment history and credit utilization rate – account for 65% of your credit score. Missed payments and overspending with credit cards are credit-score killers.

The rest of your credit score is made up of length of credit history, credit mix and new credit. It helps your score if you have a variety of credit (mortgage, car loans, student loans) and can balance using credit cards you’ve had for years with using new ones.

The whole thing may seem a little abstract, but if you do the math on a 30-year mortgage the difference between a low and high score brings it into focus. On a $250,000 mortgage, a 3.5% interest rate means a $1,122.61 monthly payment. A 4.5% interest rate would mean a $1,266.71 monthly payment.

That’s a difference of almost $52,000 by the time the mortgage is paid off.

Credit score requirements for conventional mortgages differ among lenders, but generally the score has to be at least 620. VA loans also require a 620 minimum. USDA mortgages require a 640 minimum.

Applicants for FHA loans can have a credit score as low as 500 to 579, but those loans require a 10% down payment; a credit score of 580 to 620 requires a down payment of 3.5%. The lower credit scores also mean higher interest payments.

Bankruptcies will knock as much as 200 points off a credit score, but there are things consumers can do to lessen the impact.

The first thing to do is to get a solid understanding of your finances. Make a budget that lists expenses and income. Figure out ways to lower the first category and increase the second.

The best way to raise your credit score is to pay your bills on time, since FICO and other credit scores base a large part on credit history and the amount owed versus credit limits. The best way to attack that is to stop using credit cards, or at least keep the amount you owe below 30% of your available balance.

Keep in mind that interest rates on credit cards are also determined by credit scores and can range from 16% up to the mid-20s, so working on using them less and paying them down is a win-win.

Debt management programs, offered by nonprofit credit counseling agencies, can provide advice on your budget, how to get credit card payments down and how to improve your credit.

A credit counseling agency may also recommend a debt management program as a way to reach those goals. In the programs, the agency acts as the intermediary between you and the credit card companies. They have agreements with major card companies to reduce rates for those enrolled in their program. The counselor will offer you the lower rate, and you can decide if it works for you. You would make one monthly payment to the credit counseling agency, and the agency disburses the money to each credit card company in agreed upon amounts.

This comes with a small monthly fee, but the reduced interest rate should more than make up the difference.

Taking advantage of a plan to help repair your credit after a bankruptcy could be a major step toward achieving the dream of owning a home.


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