Bankruptcy can feel like the end of the road for many people, especially those who are considering buying a home. But the truth is that getting a mortgage after bankruptcy is not only possible, it’s more common than you might think. Fortunately, even with a bankruptcy court decision in your past, you still have options.
If you’ve gone through a bankruptcy petition, whether it’s a Chapter 7 (liquidation) bankruptcy or Chapter 13 (wage earner’s plan) bankruptcy, and are looking to move forward with buying a house, this blog offers some guidance. Read on to learn how bankruptcy filers can get approved for a mortgage after bankruptcy, key loan programs available, and the specific steps you can take to boost your chances.
How bankruptcy affects your mortgage application
Bankruptcy filings can make getting a mortgage more difficult, but they don’t necessarily disqualify you. Here’s what you need to know about how bankruptcy impacts your ability to get a mortgage.
1. Your bankruptcy status and credit score
The first thing lenders will check is your credit score. Both Chapter 7 and Chapter 13 bankruptcies can cause a significant credit score drop, especially if the bankruptcy petition is recent. The good news is that your credit score doesn’t have to be perfect. There are still ways for you to qualify for a loan post-bankruptcy, as long as you meet certain credit score requirements.
In fact, many people see their credit score recover after filing bankruptcy as long as they make on-time payments, use credit repair services, and avoid accumulating outstanding debt.
2. Impact on debt-to-income ratio
Aside from your credit score, your debt-to-income (DTI) ratio is another critical factor lenders consider when approving your loan. DTI is the ratio showing the amount of debt you have compared to your monthly income. After bankruptcy, if you’ve paid off debt, cut costs, and improved your financial situation, your DTI may improve, which will then make it easier to qualify for a mortgage.
Loan options for borrowers after bankruptcy
Once you know how bankruptcy filings impact your credit score and DTI, it’s time to dive into your loan options. There are several loan types available to post-bankruptcy borrowers, including FHA loans, VA loans, USDA loans, and conventional loans. However, the type of loan you qualify for depends on the specifics of your financial situation, including your credit history, down payment, and whether you’ve met the waiting period.
1. FHA Loans: Government backed, more lenient criteria
One of the best loans post-bankruptcy borrowers can go for is the FHA loan, which is backed by the Federal Housing Administration. FHA loans tend to be more lenient when it comes to minimum credit score requirements and down payment amounts compared to conventional mortgage options.
FHA loan requirements for bankruptcy
- Chapter 7 bankruptcy: You may qualify for an FHA loan as soon as two years after your discharge date.
- Chapter 13 bankruptcy: With court approval, you could be eligible for an FHA loan after one year of your repayment plan.
2. VA loans for veterans
If you are a qualified surviving spouse or have served in the military, you may be eligible for a Veterans Affairs (VA) home loan, a government-backed loan program that offers affordable housing options. VA loans are often the best option for veterans and military families because they typically require no down payment, have competitive interest rates, and offer more favorable loan terms.
VA loan requirements after bankruptcy
- Chapter 7 bankruptcy: You may qualify after two years of discharge.
- Chapter 13 bankruptcy: You may qualify after one year of on-time payments and with court approval.
3. USDA loans for rural properties
For buyers in rural or suburban areas, a USDA loan might be the perfect fit. These loans are designed for low-income borrowers who are buying homes in areas designated by the United States Department of Agriculture. USDA loans offer competitive rates and no down payment for qualified buyers.
USDA loan requirements after bankruptcy
- Chapter 7 bankruptcy: You may qualify after three years of discharge.
- Chapter 13 bankruptcy: You can apply after one year of making on-time payments.
4. Conventional loans for borrowers with stronger financial health
If you improve your credit score, income, and down payment, you may eventually qualify for a conventional mortgage. Conventional loans are offered by Fannie Mae or Freddie Mac and require stricter credit score requirements but tend to offer better interest rates for borrowers with stable financial health.
Conventional loan requirements
- Chapter 7 bankruptcy: You typically need to wait four years after discharge to qualify.
- Chapter 13 bankruptcy: You may qualify after two years from discharge and with court approval.
Key steps to take before applying for a mortgage after bankruptcy
While it’s clear that getting a mortgage after bankruptcy is possible, preparing carefully in these four key areas can increase your chances of approval:
1. Work on credit repair
After bankruptcy, focus on repairing your credit by:
- Making payments on schedule
- Obtaining a secured credit card
- Keeping credit card balances low
- Reviewing your credit report regularly for errors
Many borrowers find that with time, their credit score improves significantly, which increases the likelihood of qualifying for better mortgage terms.
2. Save for a larger down payment
The down payment is a crucial factor for getting a mortgage, especially after bankruptcy, as lenders see a larger down payment as a lower risk. Even if you don’t qualify for zero down options like VA or USDA loans, a larger down payment can boost your chances of securing more favorable loan terms and lower monthly payments.
3. Maintain reliable income and financial health
Lenders want to see consistent income and a positive financial situation post-bankruptcy. Bank statements, tax returns, and pay stubs will all be reviewed carefully during the mortgage process. Make sure your financial documents reflect reliable income and an improving financial situation.
4. Get pre-approved
Before you start shopping for a home, consider obtaining pre-approval of a mortgage from a lender like Hopkins Financial. A pre-approval will give you a clearer picture of your loan amount eligibility and help you start shopping with confidence.
Common mistakes to avoid when applying for a mortgage after bankruptcy
Your mortgage application can go smoothly if you avoid these common mistakes:
- Not waiting long enough: Many borrowers rush into applying for a mortgage too soon after bankruptcy. Ensure you’ve met the waiting period required by your loan program before applying.
- Ignoring your credit report: Failure to review and clean up your credit file before applying could result in denial.
- Not documenting your financial situation properly: Prepare detailed financial statements, including pay stubs, bank statements, and retirement account information.
- Skipping bankruptcy court approval: If you filed for Chapter 13 bankruptcy, you need court approval to qualify for certain loan programs.
Your path to homeownership after bankruptcy
Mortgage after bankruptcy doesn’t have to be a distant dream. With the right approach, including credit repair, saving for a larger down payment, and understanding your loan options, you can secure the financing you need to buy a home. Whether you’re pursuing FHA loans, VA loans, or even conventional financing, there’s a path forward, even if you’re just emerging from bankruptcy.
At Hopkins Financial, we specialize in private lending and can help borrowers get a mortgage after bankruptcy, even if you don’t fit traditional lending requirements. Contact Hopkins Financial today to discuss your options and start your journey toward homeownership, regardless of your past financial challenges.
