Life may hit rock bottom once you declare bankruptcy. But it is definitely a great way to make a fresh start in life. In fact, you can even apply for a mortgage. Wondering how long after bankruptcy can I get a mortgage? Read on, find out this, and more.
Get A Free Mortgage QuoteHow Long After Bankruptcy Can I Get A Mortgage?
This is variable depending on the mortgage type you want to apply for. For example, you can immediately apply for a mortgage after bankruptcy only if you can afford a high interest rate and a sizeable down payment. This is typically a requirement for non-qualified mortgage programs.
On the other hand, you might have to wait one to four years after declaring bankruptcy to qualify for a standard mortgage like an FHA, conventional, USDA, or VA loan. Let’s take a deeper dive to better understand the waiting period for each standard mortgage option.
● Chapter 7 Bankruptcy
It is the most common type of non-business bankruptcy. Individuals who lack resources to pay off their debts file Chapter 7 bankruptcy to discharge their debts. Under Chapter 7, as the filer usually sells most of the assets to pay off creditors, mortgage lenders set stricter loan approval guidelines.
Here is the timeline you can expect for different loans if you filed for:
| Chapter 7 Bankruptcy | |
|---|---|
| Loan Type | Waiting Period |
| FHA | Two years |
| USDA | Three years |
| VA | Two years |
| Conventional | Four years |
Chapter 13 Bankruptcy
If you’re wondering, ‘how long after bankruptcy can I get a mortgage?’ For most loans, it is one year, while for conventional loans, it is variable. Nonetheless, you can apply for a mortgage faster under Chapter 13 than under Chapter 7 bankruptcy.
This is because Chapter 13 bankruptcy sets up a repayment plan for individuals with a consistent income. Therefore, you don’t just liquidate all your assets; instead, you enter a 3—to 5-year debt repayment plan. Once you complete the plan, it helps discharge your debts. So, paying off some of your debt rather than writing off all of it ultimately helps make a positive impression on lenders.
| Chapter 13 Bankruptcy | |
|---|---|
| Loan Type | Waiting Period |
| FHA | One year |
| USDA | One year |
| VA | One year |
| Conventional | Two years from the discharge date Four years from dismissal date |
Why Is There a Waiting Period for Mortgages After Bankruptcy?
Now that we have answered 'how long after bankruptcy can I get a mortgage?' let's examine why there is even a waiting period.
The waiting period for obtaining a mortgage after bankruptcy ensures borrowers have sufficient time to regain financial stability and demonstrate responsible credit behavior. Here are the main reasons for this waiting period:
1. Credit Recovery
Bankruptcy can drastically lower your credit score, often by several hundred points, making it challenging to obtain new credit. The waiting time allows you to rebuild your credit by demonstrating responsible financial behavior.
During this time, you can focus on consistently paying bills on time, positively impacting your payment history—a significant factor in credit scoring. Additionally, reducing existing debt improves your credit utilization ratio, another critical credit score component.
Over time, these actions help gradually improve your credit score, proving potential lenders that you are a reliable borrower.
2. Financial Stability
Lenders require evidence of financial stability before approving a mortgage. This involves maintaining consistent employment and a steady income, demonstrating your ability to make regular mortgage payments.
Additionally, keeping your debt-to-income ratio manageable indicates that you are not overextended financially. The waiting period provides the necessary time to build a positive financial track record, showing lenders that you have recovered from bankruptcy and can now handle new debt responsibly. This reassurance is crucial for lenders when considering your mortgage application.
3. Risk Mitigation for Lenders
Borrowers who have recently undergone bankruptcy are viewed as higher risk by lenders. The waiting period reduces this risk by giving lenders confidence that you have overcome financial difficulties and can manage mortgage payments reliably.
Get A Free Mortgage Quote4. Compliance with Lending Guidelines
Different mortgage programs have specific post-bankruptcy waiting periods. For example, FHA loans typically require a two-year waiting period after Chapter 7 bankruptcy and one year after Chapter 13, provided certain conditions are met. Conventional loans may require a longer period, usually four years after Chapter 7 bankruptcy.
5. Time for Counseling and Education
During the waiting period, borrowers often participate in financial counseling and education programs, which help them understand and manage their finances better, reducing the likelihood of future financial distress.
Counseling and education programs empower them to make better decisions in life and move forward in life confidently. Once they understand how to manage financials, it dramatically lowers their chances of going bankrupt again.
6. Opportunity for Savings
The waiting period offers a valuable opportunity to save for a down payment, which can lead to securing better mortgage terms, such as lower interest rates and reduced monthly payments. This savings period demonstrates financial responsibility to lenders, showcasing your ability to manage and accumulate funds. A more significant down payment also decreases the loan-to-value ratio, reducing the lender's risk and enhancing your overall mortgage application profile.
Wrapping Up
In a nutshell, bankruptcy can hit your credit score dramatically. Therefore, rebuilding your credit score to get a mortgage loan on better terms and rates is vital. In general, VA loan borrowers may not have to make down payments or mortgage insurance.
Still, if you have filed a Chapter 7 bankruptcy, then you may have to follow specific requirements like waiting for 2 years before you can apply for the mortgage and have a minimum credit score of 530 to 640. Also, there should be no derogatory credit or late payments since you have filed bankruptcy. For more information or to compare mortgage loan terms and rates from different lenders, visit FetchaRate. Find the best rates today.