Does Bankruptcy Mean No Mortgage? Interested In Getting One? Become Prepared!

You may think filing for bankruptcy is associated with a zero possibility of getting a mortgage. Well, obtaining a mortgage can be difficult in such a scenario, but not impossible. Going through the bankruptcy process indicates that you are unable to pay your debts or outstanding obligations. This legal declaration would bring a heavy dip in your credit score and a negative mark on your credit report, which in turn means a reluctance of lenders to lend you money.

However, by taking proper actions and choosing the right time, you can get a mortgage even after declaring bankruptcy.

Let’s dig in to know the relevant details and make the process of getting a mortgage after bankruptcy easier for you.

What are Bankruptcy Types? How long do I have to Wait for Mortgage Eligibility Post-bankruptcy?

If you have declared bankruptcy, you cannot escape the downtime for submitting a mortgage application. The type of bankruptcy you filed for and the type of mortgage you're applying for determine your waiting period. There are two main types of bankruptcy filings: Chapter 7 and Chapter 13.

• Chapter 7
  
  Chapter 7, also known as a 'liquidation bankruptcy', involves the discharge of most or all of your outstanding debts by selling your assets to repay your creditors. However, some assets are exempt from liquidation, including your primary residence and personal belongings. The majority or all of your unsecured debts, including credit card debt and medical bills, may be discharged at the end of the process, which typically takes a few months. After a Chapter 7 bankruptcy, you have to wait for the following number of years before applying for different loans:
  
  
  • USDA loan: 3 years (after filing)
  • FHA or VA loan: 2 years (after filing)
  • Conventional loan: 4 years (after filing)


• Chapter 13
  
  It involves creating a payment plan to repay creditors over a specified period of time, usually 3-5 years, using a portion of your earnings. The amount repaid is usually a percentage of the total amount owed.
  
  The waiting periods for getting a mortgage are typically shorter after a Chapter 13 bankruptcy, as compared to Chapter 7.
  
  The waiting times for a mortgage application after a Chapter 13 bankruptcy are:
  
  
  • FHA, VA, or USDA loan: 1 year (from the filing)
  
  
  • Conventional loan:
    
    
    • 2 years after discharge - A discharge happens when the filer follows the court-established repayment schedule.
    • 4 years after the dismissal - A dismissal occurs when the filer is unable to do so, which leads to the court dismissing the case.

• Check your Credit Reports Regularly
  
  Check your credit report frequently to ensure all the information on your report is up-to-date and correct, as lenders use this information to determine whether you qualify for a mortgage.
  
  If there are any inaccuracies in your credit report, your credit score could be negatively impacted, which would make it harder for you to get a mortgage. Getting a hold of your credit report is not a problem. The three major credit bureaus (Equifax, Experian, and TransUnion) are required to provide your credit report free of cost.


• Rebuild your Credit
  
  You need to rebuild your credit after bankruptcy, as a higher credit score indicates a higher chance of mortgage approval. To rebuild credit it's important to pay your bills on time to indicate your level of responsibility to the lenders.
  
  Your credit score can also be raised by keeping your credit utilization rate (the percentage of available credit you're using versus your credit limit) low. Generally speaking, you should aim to keep your credit utilization rate under 30%.
  
  Your credit score can also be raised by opening new credit accounts, but only if it's done responsibly. However, avoid opening too many accounts at once, as this can harm your credit score as well.


• Maintain Steady Employment & Income
  
  A stable employment history shows that you have a reliable source of income, and proves that you can make consistent payments on your mortgage. Usually, lenders will look for at least two years of steady employment history, but some may require more.
  
  If you have a history of changing jobs frequently, this may raise red flags for lenders, as it may indicate that you have a higher risk of defaulting on the loan. You might find it more difficult to get a mortgage approved if your income fluctuates or is insufficient to satisfy the lender's requirements of the debt-to-income ratio.


• Understand the Impact of Bankruptcy on Mortgage Interest Rates
  
  Due to higher associated risks for lenders, getting a mortgage after bankruptcy comes with higher interest rates than what you'd get otherwise. It means your monthly payments and the cost of your loan would be higher. You'll need to factor in these costs when budgeting for a mortgage.
  
  However, paying a higher interest rate doesn't mean you'll be stuck with it forever. If you improve your credit score and financial position, you can refinance your mortgage later to obtain a better interest rate.


• Save for a Larger Down Payment
  
  Saving for a larger down payment is another essential step. While some loan options, such as VA and USDA loans, may not require a down payment, having a larger down payment can help you secure a more favorable interest rate and lower monthly payments.


• Gather Relevant Documents
  
  Collect all the necessary documents and paperwork that lenders will require when you are applying for a mortgage. The required documents include your bankruptcy discharge and schedule documents, current pay slips, two years' worth of tax returns, and other relevant records.


• Find a Specialized Lender for Mortgage Applicants with Bankruptcy
  
  Without any doubt, you need to consider the interest rate, fees, mortgage requirements, loan term, repayment terms, and reputation/experience of the lender. But in addition to these factors, try to find a lender who has experience working with clients that have undergone bankruptcy. It can be helpful in several ways. Firstly, these lenders might be more receptive to working with clients for finding a mortgage solution that meets the client’s needs because they are more aware of the unique financial challenges brought on by bankruptcy.
  
  In addition, specialized lenders might have more open-minded lending standards. This means that when reviewing your mortgage application, these lenders may overlook certain credit blemishes or might take into account alternative sources of income or credit history. This can be helpful for those who have had a hard time rebuilding their credit after bankruptcy.
  
  They are also a great source of support and can provide the right guidance in the mortgage application process. They might be able to offer resources and advice on managing debt, improving credit scores, and preparing financial documents for the application.


• Consider Alternative Lenders
  
  If you've filed for bankruptcy and can't wait for the minimum waiting period to pass, you might consider alternative lenders, such as private lenders or credit unions. These lenders often have much more accommodating lending criteria and are ready to work with clients who don't have excellent credit.
  
  Credit unions are non-profit financial organizations that are run and owned by the members of those organizations. These lenders often have more flexible lending requirements and may be more willing to work with you even if you have less-than-perfect credit.