Getting a mortgage after bankruptcy can be challenging. But if you work hard to get control of your finances and improve your credit history, and be selective about when and where you apply for a home loan, you will eventually be able to buy a house. Depending on your circumstances, that day might be sooner than you think.
Bankruptcy stays on your credit report for up to ten years -- longer if you apply for a loan of $150,000 or more. How this affects your credit score depends on your credit history prior to the bankruptcy. If you had good credit and a high FICO score (which is rare for more bankruptcy filers), the bankruptcy will cause your score to plummet. If, however, you had poor credit history prior to bankruptcy (which is the case for most bankruptcy filers), the impact of the bankruptcy on your already low score will not be huge. In fact, if the bankruptcy allows you to get back on your feet by eliminating or reducing debts so that you can start paying your accounts on time, you may be able to improve your credit faster than if you continued to struggle with a mountain of debt.
Learn more about Bankruptcy and Your Credit.
Although getting a mortgage after bankruptcy is difficult, there are several things you can do or try:
Mortgage lenders, like all creditors, want to see that you make payments on time, have a good debt-to-income ratio, and can use credit responsibly. You can start by getting control of your finances, making all account payments on time, and getting a secured or other credit card so that you can build a positive credit history.
FHA backed loans tend to be more forgiving of poor credit, and bankruptcy, than non-FHA backed loans. These loans are offered by traditional lenders but guaranteed by the government. The FHA will insure home loans after one year of payments in a Chapter 13 bankruptcy and two years after a Chapter 7 discharge.
By providing supporting documentation of why you declared bankruptcy in the past (such as evidence of a job loss or medical bills), you may be able to help facilitate the approval of your application for an FHA loan.
Some of these institutions engage in traditional underwriting – which means they look at your whole financial picture, not just your credit score. So, for example, if you have turned your financial situation around, have a good income, and can show that your bankruptcy was necessary due to large medical bills, a credit union may lend to you, even if your credit score is low.
If you have someone willing to cosign the loan, a bank may be more likely to approve it. Check with the bank to see how it views cosigners. If you go this route, make sure you make your payments on time. If you don’t, your cosigner will be on the hook.
Mortgages are secured loans with the home acting as collateral. Because of this, mortgages are less risky than certain other types of loans since the bank can take the house if you don't pay. The more equity you have in the house, the less risk there is to the bank. For example, if you put 20% of the sales price down, the bank will be more likely to get reimbursed for the amount due under the loan contract if it must foreclose.
Repeatedly applying, and getting rejected, for a mortgage hurts your credit. Don’t apply for a mortgage until you believe you have a good chance of acceptance. If you are turned down, wait at least six months before applying again.
You may be able to get a mortgage from a subprime lender – lenders that offer loans to people with bad credit. Subprime loans have exorbitantly high interest rates, hidden fees, interest rate jumps, balloon payments, and other onerous loan terms. For many people, getting a subprime loan is a recipe for eventual foreclosure. It’s better to bide your time by renting until you can qualify for a good mortgage. The last thing you need after bankruptcy is sign up for debt that you can’t handle.
If you have questions about bankruptcy and how it will affect your ability to buy a home later, consider consulting with an an experienced bankruptcy attorney.
For more tips on getting loans and credit post-bankruptcy, see Getting Credit Cards, Loans, and Mortgages After Bankruptcy.