A bankruptcy impacts your ability to get a mortgage in two ways. First, lenders impose waiting periods from date of discharge following negative credit events such as a bankruptcy. The length of the waiting period varies depending on the type of bankruptcy and mortgage program.
The second way that a bankruptcy affects getting a mortgage is that it usually significantly lowers your credit score which can affect your ability to get approved for the loan as well as your mortgage rate and what size loan you qualify for. We explain these two issues in detail below as well as how to get a mortgage following a bankruptcy if you do not want to wait.
As referenced above, lenders apply waiting periods after your bankruptcy is discharged before they accept your loan application. We provide a comprehensive overview of the mortgage waiting periods following negative credit events on FREEandCLEAR for you to review. For example, for a Chapter 7 Bankruptcy the waiting period is four years for a conventional mortgage and two years for an FHA or VA mortgage. For a Chapter 13 Bankruptcy the waiting period is two years for a conventional mortgage.
The waiting periods may be shorter if you experienced an extenuating circumstance such as a job loss, medical illness or divorce that contributed to the derogatory credit event. Please note that you are required to provide documentation to verify the extenuating circumstance such as a termination notice for a job loss, health records and bills for a medical illness or the legal documents for a divorce.
Although it requires additional effort and documentation by borrowers, demonstrating that you experienced an extenuating circumstance can significantly reduce the waiting period before you can apply for a mortgage after a bankruptcy. For example, if extenuating circumstances contributed to a Chapter 7 Bankruptcy, the waiting periods are two years for a conventional mortgage (as compared to four years if no extenuating circumstances apply), one year for an FHA mortgage and one-to-two years for a VA mortgage.
The waiting periods following a Chapter 13 Bankruptcy typically do not vary significantly even if extenuating circumstances contributed to the event. The positive news is that regardless of the issues that led to your bankruptcy, you may be able to qualify for a government-backed loan such as an FHA, USDA or VA mortgage before a Chapter 13 Bankruptcy is discharged. To qualify for these mortgage programs you must be at least twelve months into your bankruptcy plan, have made all of your required debt payments on-time and the bankruptcy judge or trustee is required to provide written permission for you to get a mortgage.
You must also qualify for the mortgage according to program guidelines for your credit score, debt-to-income ratio, employment history and other factors. We provide comprehensive overviews of the FHA, USDA and VA mortgage programs, including detailed qualification and eligibility requirements, for you to review.
To summarize, depending on the circumstances that led to your bankruptcy, your discharge date and the loan program you select, you may not be required to wait before you apply for a mortgage, even if you have not completed your bankruptcy plan.
In addition to lender-imposed waiting periods, a bankruptcy can also negatively impact your credit score. A low credit score affects your ability to get approved for a mortgage, your interest rate as well as what size loan you qualify for. Most mortgage programs apply a minimum credit score requirement. For example, the minimum credit score required for an FHA loan is 500 if you make a down payment of at least 10% and a minimum score of 580 if you make a down payment between 3.5% and 10%. For conventional loans, the minimum credit score required ranges from 620 to 680 depending on the mortgage program and lender. So if your bankruptcy resulted in a significant drop in your credit score you may not be able to qualify for a mortgage or certain programs.
Even if you can get approved, it is important to highlight that applicants with lower credit scores pay higher mortgage rates and borrowers with higher scores pay lower rates. We provide a comprehensive overview of the credit score required for a mortgage including how your score impacts your mortgage rate. Your mortgage rate directly impacts what size loan you can qualify for. In short, the higher your rate, the lower the loan amount you can afford, and vice versa.
The good news is that if your credit score has improved since your bankruptcy and your score is good-to-excellent, then it may have little or no impact on your mortgage rate. Additionally, if you make a down payment of at least 20% of the property purchase price, you typically receive a lender's lowest mortgage rate for your credit score category. You can use our Mortgage Qualification Calculator to determine what size loan you can afford based on your interest rate as well as your monthly gross income and debt expense.
We always recommend that you contact multiple lenders to understand how they would handle your unique situation. The table below lists lenders in you area. We advise you to contact at least five lenders as qualification guidelines vary, especially for applicants who have experienced a bankruptcy.
If you do not want to wait to apply for a mortgage following your bankruptcy, you may want to consider a private money lender as they do not apply waiting periods. The plan would be to get a mortgage through a private money lender after your bankruptcy is discharged and then refinance that loan with a standard mortgage after your credit profile has improved. The downside to a private money mortgage is that you pay a significantly higher interest rate and fees as compared to a standard mortgage plus some of the loan terms may be more onerous.
We explain how private money mortgages work as well as what you should know about a private money mortgage on FREEandCLEAR. If you apply for a loan with a private money lender be sure to fully understand the higher interest rate, costs and extra fees, including any prepayment penalty, charged by the lender.
You can use our FREEandCLEAR Lender Directory to search for private money lenders in your state.