Tips on Getting a Mortgage After Filing for Bankruptcy

FT Contributor  | 

When you file for bankruptcy, you complete a process with the federal court system that allows you to sell assets to repay extreme debt or enter a new repayment plan that’s more realistic for your budget. There are six types of bankruptcy: Chapter 7, 9, 11, 12, 13, and 15. The two most common forms are Chapter 7, which forces the filer to liquidate assets to pay creditors, and Chapter 13, which allows the filer to enter a repayment plan to stay protected from creditors and absolve debt.

After your bankruptcy has been processed by the court system, it lowers your credit score and remains on your credit history for years. While these negative effects might make it feel as though you’ll never qualify for a loan again, lenders may be more willing to loan you money than you think. There are ways to obtain a mortgage even after you file for bankruptcy if you’re willing to investigate your home loan options and work to improve your credit score.

How Does Bankruptcy Affect Getting a Mortgage?

If you’re wondering how bankruptcies affect mortgages, it’s a matter of credit. When a bankruptcy appears on your credit report, it decreases your score. The number of points your score will plummet depends on the details of the bankruptcy you filed.

Your bankruptcy will remain on your credit report for up to 10 years if you filed a Chapter 11 or 7 bankruptcy and up to seven years after a completed Chapter 13 bankruptcy. Having a lower credit score and a bankruptcy on your report can impact your ability to qualify for a mortgage until the bankruptcy disappears from your history.

Can You Still Get a Mortgage Loan if You’ve Filed for Bankruptcy?

In some cases, you can still get a mortgage loan if you’ve filed for bankruptcy. If you had a high credit score before you filed for bankruptcy, you’ll see a dramatic decrease in your score once your filing is complete. This can affect the mortgage terms you qualify for.

If your score was already low, your bankruptcy may not affect your credit score as much but will remain on record. Even with a bankruptcy on your credit history report and a lower credit score, you may still qualify for a mortgage.

Average Interest Rate of a Mortgage Loan After Filing for Bankruptcy

According to LendingTree, people who have 3-year-old bankruptcy on their record are offered a mortgage with an interest rate that is, on average, 19 basis points higher than those without a bankruptcy. A basis point equals one-hundredth of 1%, or .01. On average, then, a bankrupt borrower spends $8,887 more on mortgage terms than a borrower in good standing.

When you have a bankruptcy on your credit report, lenders are more wary of you as a borrower. Therefore, you may be offered mortgage loans with higher interest rates.

Keep in mind, with a higher interest rate, your monthly payments will also be higher. Therefore, it’s important to re-calculate how much house you can afford with these mortgage terms in mind to ensure you stay within budget.

Private Mortgage Insurance

Depending on the type of loan you qualify for, you may be required to pay private mortgage insurance (PMI). This additional fee is common with conventional loans but can usually be avoided if you provide a down payment of at least 20%. PMI is a fee added to your monthly mortgage payment that only disappears once you have at least 20% equity in the home. It’s another expense you should calculate when figuring the budget for your new home.

Types of Mortgage Loans to Consider After Filing for Bankruptcy

FHA Mortgage

To apply for a Federal Housing Administration (FHA) mortgage, contact an FHA lender at a financial institution. The lender will review your credit score, history, income, and debts to determine if you qualify for a mortgage. They typically require low down payments, offer low interest rates, and have easier credit score requirements than other loan types.

The qualification requirements for an FHA loan after a bankruptcy depend on the type of bankruptcy you filed. After filing a Chapter 7 bankruptcy, you must wait at least two years after your discharge date before you can apply for an FHA mortgage. However, since FHA loans are administered individually by financial institutions, each lender can set its own waiting period.

With a Chapter 13 bankruptcy, you don’t have a waiting period. However, you must make your debt repayment plan payments successfully for at least one year before you qualify. If you’re still paying for your Chapter 13 bankruptcy, you’ll not only need approval from the FHA and lender for your mortgage, you’ll also have to get approval from the bankruptcy court before you qualify.

VA Mortgage

A Veteran’s Affairs Department (VA) loan is for reservists, active duty, veterans, and their family members. This loan is similar to an FHA loan because it usually requires a low down payment, offers a low interest rate, and doesn’t charge PMI. When you apply for a VA loan, your credit score, income, and debts are analyzed before mortgage terms are offered.

After filing a Chapter 7 bankruptcy, you must wait two years before applying for a VA mortgage. If you filed a Chapter 13 bankruptcy, you must make consistent payments on your repayment plan for at least a year before applying for a VA mortgage.

USDA Mortgage

A U.S. Department of Agriculture (USDA) mortgage requires little to no down payment and usually offers a low interest rate. To qualify, you must have a low or moderate income and buy a property in a rural area. Your credit report, income, debts, and other qualifications are analyzed by a lender before mortgage terms are provided.

After a Chapter 7 bankruptcy, you must wait three years from your discharge date before you’re eligible for a USDA mortgage. After a Chapter 13 bankruptcy, you must wait at least one year to apply for a USDA mortgage.

How to Get Approved for a Mortgage After Filing for Bankruptcy

It’s hard to qualify for a mortgage with bad credit, which is what you may be facing after filing for bankruptcy. In some cases, it’s best to wait and build your credit score before buying a home. This way, you can obtain the best loan terms and you can generally afford a higher purchase price. To build your credit, it’s important to:

  • Pay your bills on time: Pay bills and your repayment plan payment, if applicable, on time each month to increase your positive payment history with creditors.
  • Create a budget: Make a realistic budget based on your income and expenses and stick with it so you don’t get back into debt.
  • Get a secured line of credit: A financial institution offers you credit (with assets as collateral) that you pay back in full, increasing your score.
  • Monitor credit reports: If you find any errors on your report, claim them immediately.
  • Watch out for credit repair scams: If a credit repair company wants money upfront or sounds too good to be true, avoid it.

While getting a mortgage after a bankruptcy may seem impossible, you may qualify for a loan after your waiting period has passed. Building your credit is the best way to ensure you’re offered adequate mortgage terms. When you apply for a mortgage, the lender may ask for details on your bankruptcy. Be ready to provide these details so you can get the best mortgage terms based on your situation.


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This post was updated December 18, 2019. It was originally published December 18, 2019.