When Can I Get a Mortgage After Bankruptcy?

Filing for bankruptcy doesn't have to put a damper on your home buying dream—at least not for long. Lenders have eased requirements, opening the door for bankruptcy filers to get back into a home sooner than in the past.

Currently, the average waiting period is two years. In this article, you'll learn about common mortgage loans and the respective eligibility requirements for bankruptcy filers.

Federal Housing Authority (FHA) Loan

An FHA loan is a federally-insured loan. It's attractive to first-time, cash-strapped home buyers because it offers the ability to put down as little as 3.5% of the purchase price.

Additionally, the credit score requirements are more liberal than conventional loans. You'll likely qualify with a credit score of:

• 640 and 3.5% down
• 580 if you can afford a higher interest rate, or
• 500 and 10% down.

If you'd like better terms, consider taking steps to improve a credit score of less than 640.

After a Chapter 7 Bankruptcy Discharge

In most cases, you'll need to wait two years from the date of your Chapter 7 bankruptcy discharge before you'll qualify for this loan. Keep in mind that a discharge date isn't the same as the filing date. The court sends out the bankruptcy discharge paperwork just before your case closes.

• Credit score requirement when you've opened new accounts. Meeting credit requirements won't be as much of a hurdle as you might think. If you open new credit accounts after your bankruptcy, you'll need to show that you've established a good credit history by paying your payments on time.
• How to avoid the credit score requirement. FHA has another rule—you can qualify by choosing not to open any credit accounts after bankruptcy.
• Speeding up the process using the 12-month exception. At times, people file for bankruptcy due to no fault of their own. If you fit into this category and can demonstrate that filing for bankruptcy was beyond your control, you might be able to reduce the waiting period to twelve months. Additionally, you'll need to show that you've handled your financial affairs responsibly after the bankruptcy.

After You've Filed for Chapter 13 Bankruptcy

Filing for Chapter 13 bankruptcy is a three- to five-year process—but that doesn't mean that you can't buy a house during that time. You can obtain an FHA loan before you complete your plan if you meet the following conditions:

• You've paid 12 months of plan payments.
• The court approves your request to purchase a house with an FHA loan.
• You can demonstrate that the reason you filed for bankruptcy is unlikely to occur again.

Keep in mind that the court might not be on board if you'd have to reduce the amount paid to your creditors in your plan to qualify for a home loan. And if you have to present the terms of the house purchase in your motion (the legal procedure you'll use to make your request), you might have a hard time closing the deal. Many sellers would be unwilling to take their house on the market on the chance that you'll obtain the necessary court approval.

If you're considering this option, you should consult with a knowledgeable bankruptcy attorney before filing. A lawyer can advise you about the feasibility of a future loan qualification and, if possible, assist you by putting together a repayment plan that will help you reach your goal.

United States Department of Agriculture (USDA) Loan

Low- and middle-income borrowers willing to purchase a home in a rural community will benefit from this loan. It offers a low-interest, no down payment option for those who might not otherwise be able to qualify for conventional financing.

Applicants will be eligible for this loan three years after receiving a Chapter 7 discharge. However, if you qualify for the exceptional circumstances exception—for instance, by demonstrating that the bankruptcy was beyond your control and not a result of financial mismanagement—you might be able to qualify as soon as 12 months after the discharge.

A Chapter 13 bankruptcy filer can apply after 12 months of successful plan payments, or sooner on a showing of exceptional circumstances. To find out more, visit the United States Department of Agriculture Rural Development website.

Veteran's Affairs (VA) Loan

The VA loan program is a benefit given to veterans to help with housing needs. Here are some of the hallmarks of this loan program:

• no down payment
• no minimum credit score
• greater allowance of seller credits and concessions than other loans, and
• unlimited use of the loan program.

The VA considers your credit re-established after bankruptcy when you've had two years of clean credit. Keep in mind, however, that individual lenders participating in the VA program can require a specific credit score.

Also, even though a bankruptcy, foreclosure, or low credit score will not disqualify you automatically, there's an exception: You'll have to pay back any money owed if you previously purchased a house with a VA loan and lost it due to foreclosure.

For additional information, you can visit the U.S. Department of Veterans Affairs.

Conventional Loans

Private loans—such as a conventional loan—aren't insured by the government. Instead, you'll protect the lender against loss by paying private mortgage insurance each month. The insurance carrier will pay the lender if you're unable to make good on your obligation.

Interest rates and credit score requirements tend to be higher than that of an FHA mortgage. One benefit, however, is that you'll likely be able to stop the insurance payment once the property equity equals 20% of the initial mortgage amount. (The insurance associated with an FHA loan won't go away for the duration of the loan.)

This loan product can help people with higher debt loads purchase a home.

Qualifying for a Conventional Loan With Student Loan Debt

Not only can you have a higher debt-to-income ratio, but you might also have an easier time qualifying if you're carrying a large amount of student loan debt. Here are the figures the lender can choose between:

• the monthly payment amount reported on your credit report
• if you're on an income-driven payment plan and paying $0 per month, the lender can use $0 as a qualifying payment, or
• if the borrower is in forbearance or the loan is deferred
  • 1% of the loan balance, or
  • a monthly amount that would fully pay off the balance under the loan terms (amortized payment).

If your fully-amortized payment is less than 1% of the total loan balance formula, you can use the lesser number.

Example. Suppose that you owe $100,000 in student loan debt. Using the 1% of the balance criteria, you'd be attributed a payment of $1,000 per month. However, $100,000 amortized over 30 years at 5% interest is $537 per month—an amount significantly less. You'll be in a better position to receive a mortgage approval under the second scenario.

Many lenders don't understand these rules completely. You can try referring them to the guidelines on the Fannie Mae website.

Post-Bankruptcy Guidelines

Conventional loans still have the longest post-bankruptcy waiting period, overall, but they've eased a bit. Depending on your circumstances, you'll wait two to four years, as follows:

• Chapter 7 or 11 bankruptcy. You'd be eligible 24 months after the discharge or dismissal if the bankruptcy were beyond your control, or after 48 months if the discharge was due to financial mismanagement.
• Chapter 13 bankruptcy. You'll need to wait 24 months after receiving your discharge, or 48 months after a dismissal (cases often get dismissed for failing to complete a plan).

Circumstances beyond your control often include divorce, illness, and sudden loss of income.

Additional Requirements and Assistance

It won't come as a surprise that you'll need to meet other criteria, too—although you might not realize that individual lenders could impose tougher guidelines. Even so, with persistence, it's likely that you'll find a bank who will be willing to work with you.

Additionally, your state could have a first-time homebuyer program to help with your down payment. With the right combination of programs, chances are you'll be in your new house in no time.

You can find out how to rebuild your credit in Improving Credit After Bankruptcy or Foreclosure.

Updated: November 1, 2018