Yes, you can get a mortgage after a Chapter 7 bankruptcy. Lenders have their own requirements and waiting periods.
Written by Attorney Eva Bacevice.
Updated September 23, 2020
Yes! You don’t have to give up on the American dream of becoming a homeowner just because you filed a bankruptcy. You can absolutely get a mortgage after a Chapter 7 bankruptcy. The larger question is when are you able to qualify for a mortgage, which can vary based on the type of loan you are pursuing.
In general, for most loans you are eligible two years after you receive your discharge in a Chapter 7 case. Below we’ll examine the different types of real estate loans and their guidelines, and offer suggestions for steps you can take to best prepare for your home purchase.
Getting New Credit After Bankruptcy
It’s actually a lot easier than most people think to get credit after filing a bankruptcy. It’s not unusual for people to receive credit card offers shortly after filing bankruptcy. It makes sense when you stop and think about it - one of the factors that goes into determining how credit-worthy you are is how much other debt you are currently carrying.
Once you receive a Chapter 7 discharge, all of the old unsecured debt is gone and so you have increased your ability to pay off any new debts. You do, of course, want to be mindful of your financial situation and make sure your monthly income is sufficient before taking on any new debt. And not all creditors will be quite as quick to offer a loan, especially if it’s for a significant amount like a home purchase.
Mortgage lenders are still willing to take a chance on you after a bankruptcy, but they do want some assurance that you will be able to maintain the payments. Having a waiting period in place gives you the chance to rebuild your credit score and show that you have the ability to take on and maintain mortgage payments.
Waiting periods can vary from 2 - 4 years following your Chapter 7 bankruptcy. It’s important to note that the waiting period will start to run from the discharge date, not your original filing date. Waiting periods can increase if you have filed multiple bankruptcies or if you have a foreclosure.
But, most mortgage lenders will reduce the waiting period if you can prove that you filed your bankruptcy because of extenuating circumstances that were beyond your control and not related to financial mismanagement. Examples of a situation like this include the death of a spouse, a natural catastrophe or a severe medical illness.
Types Of Mortgages And Their Rules
There are two main types of mortgages: (1) government backed loans and (2) conventional loans. Both categories have subsets.
Government-backed loans are mortgage loans “backed” by the federal government which protects the lender in the case of a payment default. They all require a specific waiting period after a bankruptcy filing.
Federal Housing Authority (FHA) Loans
FHA loans are a good fit for first-time homebuyers and those with a less than perfect credit history who would have a harder time getting a conventional loan. Here, the government doesn’t loan you the money, instead guaranteeing loans from private lenders. If the borrower doesn’t pay as agreed, the federal housing administration protects the lender.
Some of the hallmarks of FHA loans include more liberal credit score requirements and lower down payments (buyers can put down as little as 3.5% of the purchase price). There is also a specific FHA rule which allows you to avoid the credit score requirement, meaning, you can qualify for an FHA loan even if you choose not to open any credit accounts after bankruptcy.
For FHA loans, the waiting period is 2 years after your bankruptcy discharge. If, however, you are able to prove extenuating circumstances, you may qualify for the 12-month exception. For this to be approved, you’ll need to show that you filed bankruptcy through no fault of your own and that you’ve handled your finances well since that time.
United States Department of Agriculture (USDA) Loans
USDA loans exist for borrowers who are interested in purchasing a home in a rural community. USDA loans offer low interest rates as well as a no down-payment option. The waiting period for USDA loans is 3 years after your Chapter 7 discharge. Although you can qualify as soon as 12 months after your discharge if you can prove extenuating circumstances led to your bankruptcy filing.
Veteran’s Affairs (VA) Loans
VA loans are a benefit given to veterans. These can also have very favorable terms including no down payment and no minimum credit score requirement. You can be eligible for a VA loan 2 years after your bankruptcy so long as your credit is clean for that period.
Conventional loans are private loans made by banks and mortgage companies without government backing. In theory, this means that conventional loans don’t need to follow the government waiting period. However, most of these loans are sold to either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). In order to be eligible for purchase by Fannie Mae or Freddie Mac, there are specific borrower guidelines. Most conventional loans conform to follow these guidelines.
Conventional loans require a down payment and private mortgage insurance (“PMI”) payments until the property equity equals 20% of the initial loan amount. If you can’t put down the full 20% at the time of purchase, you’ll have to pay PMI. Conventional loans usually require higher credits scores.
The waiting period for conventional loans can vary from 2 - 4 years. Here, again, extenuating circumstances can reduce the waiting period to 24 months. Fannie and Freddie define this as "nonrecurring events that are beyond the borrower's control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations."
This waiting period can be longer if you’ve filed multiple bankruptcy cases. In that case, you’ll need to wait 5 years from the most recent discharge, though extenuating circumstances can reduce this to 3 years.
Impact Of Foreclosure On Waiting Periods
All of the above waiting periods can be impacted, and potentially increased, if your bankruptcy included a foreclosure. In that case, the FHA loans’ waiting period increases to 3 years and conventional loans increases to 7 years. Both VA and USDA loans remain the same, at 2 and 3 years, respectively. Proving extenuating circumstances can reduce the waiting period.
Steps To Take While You Wait
Now that we have explained the reasons for a waiting period and the different timelines, let’s shift to what you can focus on in the meantime to make your home-buying dream a reality. There are a number of steps you can take to improve your situation and build good credit immediately following your bankruptcy discharge.
Rebuild Your Credit
Your Chapter 7 bankruptcy will stay on your credit report for ten years with all three credit bureaus, but your score can start improving as early as your discharge date. The other type of bankruptcy - Chapter 13 bankruptcy, stays on your credit report for only 7 years after filing bankruptcy.
You should get in the practice of monitoring your credit report to make sure all the information is correct and be able to address any inaccuracies as quickly as possible. You should also set a reasonable budget for moving forward so that you are confident that you can maintain your ongoing living expenses.
Increase Your Savings
When you’re creating your budget for life after bankruptcy, it’s a good idea to incorporate savings for an emergency fund to avoid further financial problems and to start saving for a house down payment if home ownership is your goal. The more you are able to put away for this purchase the less you will need to borrow and the more favorable rates you will get with any mortgage.
Pre-qualify For A Mortgage
When you’re ready to start looking for a new home, it’s a good idea to get prequalified first. That will tell you the appropriate purchase price range to look for and will give you an idea of what your monthly payment will be.
The dream of home-ownership is by no means over simply because you filed a bankruptcy case. It’s absolutely still possible to achieve this goal, but be aware that it may just take a little more time and effort. Ideally, the end result will be that you end up in a home that you can afford and live in comfortably for a long time to come.
- HUD. (2010, September). Minimum Credit Scores and Loan-to-Value Ratios. Retrieved August 10, 2020, from https://www.hud.gov/sites/documents/10-29ML.PDF
- U.S. Department of Agriculture. (2018, March). Section 502 Direct Loan Program’s Credit Requirements. Rural Development. Retrieved August 10, 2020, from https://www.rd.usda.gov/files/RD-SFH-CreditRequirements.pdf
- U.S. Department of Veterans Affairs. (n.d.). Eligibility requirements for VA home loan programs. Retrieved August 10, 2020, from https://www.va.gov/housing-assistance/home-loans/eligibility/