Getting a mortgage after bankruptcy can be a challenge, but it’s not impossible. Many lenders have established guidelines for underwriting home loans for borrowers who’ve emerged from bankruptcy, completed a waiting period, and otherwise met certain eligibility requirements. This guide will discuss how bankruptcy impacts your ability to get a mortgage, loan programs available, and tips for getting approved.

Part I: How Bankruptcy Impacts Your Ability to Get a Mortgage

Whichever bankruptcy chapter applies, the bankruptcy will stay on your credit report for seven to 10 years. How much it affects your credit score depends on your entire credit profile. For instance, someone with a good credit score may see a significant drop in their score. According to myFICO, someone with a score in the mid-700s might see their score drop by 100 points or more. bb On the other hand, someone who already has a poor credit score may not see a dramatic difference. Although the bankruptcy will remain on your credit report for up to 10 years, its impact will lessen over time. Before we dig into the details of qualifying for a mortgage after bankruptcy, let’s review the types of bankruptcies and the differences between each.

Chapter 7: Liquidation

This is the most common form of bankruptcy for individuals. When you file Chapter 7 bankruptcy, you will have to liquidate many of your assets (some exemptions apply) and then use the proceeds to pay your creditors. Chapter 7 essentially allows you to make a fresh start by releasing you from all dischargeable debts. This type of bankruptcy filing is typically used by people who have no hope of repaying their debts. Jason Kaplan, the owner of Mortgage Lending Associates in Bluffton, S.C., says anyone can get a mortgage after Chapter 7 bankruptcy, it’s only a matter of how much you put down and how long it’s been since the bankruptcy was discharged. “If someone has 35 percent to put down on a home, they can apply for a mortgage the day after receiving their bankruptcy discharge, but the interest rates will be high,” Kaplan says. “If a borrower waits one year after discharge, they need 25 percent down with high interest rates. At two years, 20 percent down with high rates.” After two years, it’s possible to qualify for an FHA loan with only 3.5 percent down, as long as you meet other requirements (explained in more detail below).

Chapter 11: Reorganization

Chapter 11 bankruptcy applies to businesses that wish to continue operations while repaying creditors through a court-approved reorganization plan. It gives the debtor a number of options for returning the business to profitability, including reducing debts by repaying some and discharging others, discharging onerous contracts and leases, and rescaling operations of the business. Upon completion of the plan, the business emerges with a reduced debt load and a reorganized, more profitable business. Although Chapter 11 bankruptcy applies to business, depending on the business’s legal status and whether the owner took out credit in his or her own name.

Chapter 13: Adjustment of debts

Chapter 13 is designed for individuals who have a regular source of income and a desire to pay their debts but are currently unable to do so. Chapter 13 bankruptcy usually allows the debtor to keep a valuable asset, such as their own home. In a Chapter 13 filing, the debtor proposes to the court a plan for repaying creditors. The timeline of repayment is typically three to five years. If the court approves the plan, the debtor makes payments to creditors through a trustee. As long as the plan is in effect, the debtor is protected from actions by creditors, including lawsuits and wage garnishments. Upon completion of the plan, any remaining eligible debts are discharged.

Waiting Period After Bankruptcy
Type of mortgage	Chapter 7	Chapter 11	Chapter 13
Conventional	4 years	4 years	2 years from discharge date, or 4 years from dismissal date
FHA	2 years	N/A	1 year
VA	2 years	N/A	1 year
USDA	3 years	N/A	1 year

 

When does the clock start ticking?

Waiting periods begin once the bankruptcy is discharged or dismissed. For Chapter 7 and Chapter 11, the waiting period is measured from the discharge or dismissal date of the bankruptcy action. For Chapter 13, the waiting period makes a distinction between bankruptcies that were discharges and those that were dismissed. The shorter waiting period based on the discharge date takes into account that borrowers working toward successful completion of a Chapter 13 bankruptcy have already spent some time working toward paying down debts and getting on better financial footing. Borrowers who were unable to complete their Chapter 13 plan and received a dismissal are held to a longer waiting period. Although you do not have to wait for the bankruptcy to fall off of your credit report to get approved for a mortgage, it’s a good idea to ensure that it is removed from your credit report as soon as you are eligible so you can start enjoying the benefits of a good credit score. Chapter 7 and Chapter 11 bankruptcies are removed 10 years from the filing date of the bankruptcy. Chapter 13 bankruptcies are removed seven years from the filing date. Although the credit reporting agencies should delete the bankruptcy from your credit report as soon as the seven- or 10-year waiting period is up, it’s a good idea to monitor your credit report to ensure it’s been removed when it ought to be.

Why you might want to wait

Although some borrowers can be eligible for a mortgage in as little as 12 months following a bankruptcy discharge, waiting longer may be a better move. Filing for bankruptcy has a major impact on your credit score — one that cannot be quickly remedied. Within one to four years of a bankruptcy filing, the impact of the bankruptcy on your credit score will still be significant. You’ll likely only be eligible for a loan with a higher interest rate, and you might have to come up with more money down. As shown in the illustrations below, increasing the interest rate by a single point results in paying tens of thousands of dollars more in interest over the life of a 30-year mortgage. Rather than applying for a mortgage as soon as your waiting period is up, work on establishing a solid financial track record of on-time payments and responsible use of credit. Save up enough for a 20 percent down payment so you can avoid paying mortgage insurance on top of interest. This will put you in a better position to qualify for a loan, make you eligible for a lower interest rate, and ensure you’re able to manage the mortgage payments when the time comes.

How can a foreclosure prolong a waiting period?

Post-forclosure waiting periods
Type of Mortgage	Waiting Period After Foreclosure
Conventional	2 or 4 years: If foreclosed property was discharged in bankruptcy 7 years: All other cases
FHA	3 years
VA	2 years
USDA	3 years

  For some individuals, a home foreclosure might be the catalyst for bankruptcy. In that case, having a foreclosure and a bankruptcy on your credit report can lengthen the waiting period for getting approved for a mortgage. FHA loans require a three-year waiting period after either a foreclosure or a deed in lieu of foreclosure. For a conventional loan, the typical waiting period after a foreclosure is seven years. However, Fannie Mae and Freddie Mac have special provisions that apply when the mortgage debt on a foreclosed property was discharged through bankruptcy. In that case, a borrower can be approved for a conventional loan two years after foreclosure, as long as the loan proceeds will be used to purchase the borrower’s principal residence (not an investment property), and the borrower has a down payment of at least 10 percent.

Exceptions for extenuating circumstances

It’s important to note that in many cases, the waiting periods mentioned above may be reduced if your bankruptcy or foreclosure  was due to extenuating circumstances. Fannie Mae defines extenuating circumstances as “nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.” The types of events that qualify as an extenuating circumstance vary by lender, but may include:

• illness or death of a primary earner
• natural disaster
• job loss
• divorce

If the borrower’s bankruptcy or foreclosure was the result of extenuating circumstances, the lender will require documentation to support their claim. That documentation may include a copy of a divorce decree, medical bills, notice of job layoff, job severance papers, insurance papers, tax returns, etc. The lender will also request a letter explaining the circumstances that led to the bankruptcy or foreclosure. The waiting period may be reduced to as little as one year, although lender requirements vary, so it’s a good idea to discuss your circumstances with the loan officer.

Part II: Home Loan Options After Bankruptcy

Once the waiting period has passed, your next step is to find a lender who is willing to work with a borrower who has a bankruptcy on their credit report. Fortunately, this is not as difficult as you might imagine.

Conventional mortgage

A conventional mortgage is a loan that adheres to guidelines set by Fannie Mae and Freddie Mac. Conventional loans may have either a fixed or adjustable rate and a term ranging from 10 to 30 years. In general, conventional mortgages require a minimum credit score of 620, and a down payment of at least 3 percent. Getting approved for a conventional loan after a bankruptcy requires meeting the waiting period as outlined in the table above, and demonstrating that you’ve re-established your credit. Re-establishing your credit involves paying your bills on time and keeping balances on revolving credit accounts low.

Conventional mortgage cost comparison

To illustrate the difference between getting a conventional loan before and after bankruptcy, consider a borrower who had a credit score of 740 before declaring bankruptcy. The bankruptcy was caused by a sudden illness, so it qualifies as an extenuating circumstance, and he is applying for a $250,000, 30-year mortgage two years after his Chapter 7 was discharged. At that time, his credit score is 640.

Credit Score	APR	Monthly Principal & Interest	Total Interest Paid
Before: 740 credit score	3.687%	$1,149	$163,593
After: 640 credit score	4.508%	$1,268	$206,445

In this scenario, getting a mortgage after bankruptcy will cost the borrower an additional $42,852 over the life of the loan because his lower credit score resulted in an interest rate almost a full point higher.