How to get a mortgage after bankruptcy

How bankruptcy affects getting a mortgage

Depending on the type of bankruptcy you filed for, it will have varying consequences on your credit score and your chance to get a mortgage.

• Chapter 7 bankruptcy can remain on your credit report for up to 10 years. Since this level of bankruptcy erases all eligible debts, your credit score is hit the hardest.
• Chapter 13 bankruptcy is a little gentler on your credit score since you repay some of the debt. It can stay on your credit report for up to seven years.

However, Jacques said that he has seen clients get approved for a home loan just five years after bankruptcy.

“It will, of course, be brought up in the process, but as long as you have worked hard to rebuild post-bankruptcy, then you can definitely attempt to secure a home loan,” he said. You can rebuild your credit with a secured credit card or loan, or by being an authorized user on someone else’s card.

Since mortgage lenders have credit score minimums along with debt-to-income (DTI) ratios and down payment requirements, having poor credit can make it harder to qualify for a mortgage or may result in higher interest rates. Even when you boost your credit score to meet lender requirements, underwriters will want to know the reason for your bankruptcy and assess your overall financial stability.

You will need to provide a detailed letter of explanation that highlights the circumstances leading to your bankruptcy and demonstrates your efforts to rebuild your financial standing.

» MORE: What credit score is needed to buy a house?

Mortgage waiting periods by loan type and bankruptcy chapter

The good news is that you don’t have to wait until your bankruptcy has fallen off your credit report to apply for a loan. Most loan types only have a two- to four-year waiting period after bankruptcy.

However, if you have a foreclosure on your record, along with your bankruptcy, you may have to wait up to seven years before applying for a mortgage loan.

Conventional loan

After a Chapter 7 bankruptcy, the waiting period for a conventional loan is typically four years. It can range between two and four years if you filed a Chapter 13 bankruptcy.

Conventional loans often require higher credit scores, typically around 620 or higher, and a down payment of at least 3% to 5% of the home's purchase price.

FHA loan

After a Chapter 7 bankruptcy, you may be eligible for an FHA loan after a waiting period of two years, provided you have reestablished good credit and demonstrated financial stability. The waiting period after a Chapter 13 bankruptcy is only one year.

FHA loans have more lenient credit score requirements, typically around 580 or higher, and a down payment requirement of 3.5% of the home's purchase price.

USDA loan

Backed by the U.S. Department of Agriculture, these loans provide attractive terms, including zero-down-payment options and competitive interest rates for buyers looking for property in rural areas.

The waiting period for a USDA loan is typically one year after a Chapter 13 filing or three years after a Chapter 7 filing.

VA loan

Available for veterans, active-duty military personnel and their eligible spouses, VA loans come with perks such as no down payment requirement, competitive interest rates and lenient credit score requirements.

Expect to wait one year if you filed a Chapter 13 or two years after a Chapter 7.

Applying for a mortgage after bankruptcy: step by step

Expect to have your financials scrutinized more closely during the mortgage process than someone who has not been through bankruptcy. Many lenders are willing to work with you but will need to determine that you are not a financial risk.

Step 1: Repair your credit

The first and most important step is to repair and rebuild your credit. This step can take over a year, depending on how low your credit score dropped during the bankruptcy process.

Start by reviewing your credit reports from all three major credit bureaus (Experian, Equifax and TransUnion) to identify any errors or inaccuracies.

You will also need to get your credit score above the lender’s minimum requirements (about 620) by making regular on-time payments on a secured card or loan and keeping your debt load minimal.

Step 2: Keep steady employment

Your employment history and income are great ways to show lenders that you are financially stable. Now is not the time to switch jobs. If possible, make the switch after your mortgage loan is secured.

Your lender will want to see your pay stubs, tax returns and employment verification for the loan application process.

Step 3: Save for your down payment

While most loans will require a down payment of between 3% and 5%, a larger down payment can also show the lender your serious financial commitment. In some cases, a larger down payment might help you secure a better interest rate.

However, if you can’t save up more than 5% for your down payment, don’t let it stop you from applying for a home loan.

Step 4: Build a reserves fund

A mortgage reserves fund can be made up of cash savings or eligible investments, such as vested funds in a retirement account or stocks, bonds or certificates of deposit (CDs).

Your reserves fund shows the lender that you can cover a certain number of mortgage payments if an emergency were to happen.

Step 5: Write a detailed letter of explanation

Be prepared to write a letter of explanation when you apply for your mortgage. This letter will outline the circumstances that led to your bankruptcy and the steps you have taken to ensure your financial stability.

Step 6: Work with a bankruptcy-experienced mortgage professional

When researching loan officers and mortgage brokers, look for ones who have helped post-bankruptcy clients secure homes. Mortgage professionals who are well-versed in post-bankruptcy homebuying will understand the specific requirements and can advise on what you need to do to improve your mortgage approval chances.

Step 7: Find lenders specializing in post-bankruptcy mortgages

Not all lenders work with post-bankruptcy borrowers. Look for “second chance” lenders who specialize in helping people with past credit challenges. Local credit unions, community banks and lenders offering FHA or VA loans are often more flexible and may use manual underwriting to evaluate your full financial picture.

Ask your bankruptcy attorney or credit counselor for recommendations, and compare at least three lenders to get competitive rates. Avoid lenders who guarantee approval, charge large upfront fees or pressure you to apply immediately — you might get sucked into a mortgage with terrible terms.

Alternate finance options for post-bankruptcy homebuying

If you are unable to qualify for a traditional mortgage after bankruptcy, there are other financing options. Here are a few alternatives to consider:

• Non-QM loans: Non-qualified mortgage (non-QM) loans are designed for borrowers who don't meet conventional lending standards. These loans have more flexible requirements and may allow shorter waiting periods after bankruptcy, sometimes as little as one day. However, expect higher interest rates and larger down payment requirements.
• Rent-to-own: Rent-to-own agreements work well for those with lower credit scores or higher levels of debt. The process allows you to rent a property with the option to buy it at a later date. A portion of your monthly rent payments goes toward building equity in the property, providing an opportunity to become a homeowner over time.
• Owner financing: In an owner financing arrangement, the property seller acts as the lender and provides financing directly to the buyer. This option eliminates the need for traditional mortgage lenders and may be more accommodating for individuals with a bankruptcy history. The terms of the financing, including the down payment, interest rate and repayment period, are negotiated between the buyer and the seller.
• Housing programs: A government-sponsored housing program might be available in your area for potential buyers who are struggling to meet eligibility criteria.

» MORE: How to buy a house with bad credit