Can I get a mortgage after chapter 7 bankruptcy?

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Written by Eva Bacevice, Esq.  
Updated May 24, 2019

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Yes! You do not need 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. Below we will examine the different types of mortgages and their guidelines, as well as offer suggestions for steps you can take in the meantime to best prepare for your home purchase.

  • Waiting period

  • Types of mortgages and their rules

    • Government backed loans

    • Conventional Loans

  • Impact of foreclosure on waiting periods

  • Steps to take while you wait

    • Rebuild your credit

    • Increase your savings

Waiting period

It is actually a lot easier than most people think to get credit after filing a bankruptcy. It is not unusual for people to receive credit card offers just after a chapter 7 bankruptcy discharge. 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 successfully receive a chapter 7 discharge all of the old unsecured debt is gone, so you have increased your ability to pay off any new debts. You do, of course, want to be mindful of taking on any new debt now that you have your fresh start. And not all creditors will be quite as quick to offer a loan, especially if it is 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 allows for the opportunity for you to rebuild your credit score and show that you have the ability to take on and maintain mortgage payments.

Waiting periods can vary from two to four years following your chapter 7 bankruptcy. It is important to note that the waiting period will start to run from the date of your discharge, not your original filing date. Waiting periods can increase if you have filed multiple bankruptcies or if you have a foreclosure.

Most mortgage lenders will, however, 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. This would include instances such as the death of a spouse, a natural catastrophe or a severe medical illness.

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Types of mortgages and their rules

There are two main types of mortgages: (1) government back loans and (2) conventional loans. Both categories have subsets.

Government backed loans

Government backed loans are those which are available and administered by the federal government. All of these loans restrict approval for a specific period of time following a bankruptcy.

Federal Housing Authority (FHA) Loan

FHA loans are a good fit for both first-time homebuyers and those with credit challenges who would have a harder time getting a conventional loan. Here, the government does not act as a lender itself, but guarantees (provides a promise to assume the debt obligation of a borrower if that borrower defaults) loans from private lenders.  

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).  Additionally, if you are understandably gun shy about credit following your bankruptcy, you can also qualify by choosing not to open any new accounts after your discharge. There is also a specific FHA rule which allows you to avoid the credit score requirement - you can also qualify if you choose not to open credit accounts after bankruptcy.

For FHA loans, the waiting period is two 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 will need to show that you filed the bankruptcy through no fault of your own and that you have handled your finances well since that time.

United States Department of Agriculture (USDA) Loan

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 three years after your chapter 7 discharge. Although you can qualify as soon as 12 months after your discharge if you can prove extenuating circumstances that led to your bankruptcy filing.

Veteran’s Affairs (VA) Loan

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 two years after your bankruptcy so long as your credit is clean for that period. There is a specific exception, however, which is that you would have to pay back any money you owed if you previously purchased a house with a VA loan and lost it due to foreclosure.

Conventional Loans

Conventional loans are private loans made by banks and mortgage companies without government backing. In theory, this means that conventional loans would not 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 as well as private mortgage insurance (“PMI”) payments until the property equity equals 20% of the initial loan amount. What this means in practical terms is if you cannot afford to pay 20% as a down payment, you will have to pay for this additional insurance. Conventional loans usually require both higher credits scores and higher interest rates.

The waiting period for conventional loans can vary from two to four 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 have filed multiple bankruptcy cases. In this circumstance you would need to wait for five years from the most recent discharge, with the option of a reduction to three years if you can show extenuating circumstances.

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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 three years and conventional loans increases to seven years. Both VA and USDA loans remain the same, at two and three years, respectively.  Proving extenuating circumstances can reduce the waiting period.

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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 immediately following your bankruptcy discharge.

Rebuild your credit

Your chapter 7 bankruptcy will stay on your credit report for ten years, but if all goes well it will mark a clear end to your bad financial history. You should get in the practice of monitoring your credit report to make certain 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.

It is also important to rebuild your credit to keep your future options open. You can start with a secured credit card and make certain to pay your bill in full each month. It is important to monitor how much you are charging - the ideal utilization rate for a credit card is less than 30% of the card’s limit. These two items, timeliness and utilization, account for 65% of your credit score, so you can make significant improvements to your credit with this focus.  

Increase your savings

When you are creating your budget for moving forward it is 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

It is also a good idea to get pre-qualified for a mortgage. It may take a little time to find a bank that will work with you, but the more progress you make on the above fronts the more options you will likely have. Additionally, when you are working with a particular lender be certain to inquire about other assistance that may be available, such as a first-time homebuyer program to assist with down payment in your state.

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Conclusion

The dream of home-ownership is by no means over simply because you filed a bankruptcy case. It is 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.

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