Bankruptcy can feel like a last resort when financial struggles become overwhelming. If you’re considering bankruptcy as a solution, it’s essential to understand that you’re not alone. As of September 2024, there were nearly 490,000 bankruptcy filings in the U.S. While bankruptcy should always be the last option, it is something you can bounce back from. If you’re wondering whether you can buy a home after bankruptcy, the answer is yes, but it comes with a few conditions. Let’s dive into what you need to know about bankruptcy and your mortgage options.
Understanding Bankruptcy: Chapter 7 vs. Chapter 13
Before we jump into how bankruptcy affects your ability to secure a mortgage, it’s important to understand the two most common types of bankruptcy: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 is often referred to as “total bankruptcy” because it wipes out much, or all, of your debt. In return, some of your property may need to be liquidated to pay creditors. This type of bankruptcy directly forgives your debts, but there are some exceptions, and not everyone qualifies. If you do, you may need to give up assets included in the bankruptcy, and you’ll also need to meet income limits or pass a means test.
Chapter 13 Bankruptcy
Chapter 13, unlike Chapter 7, doesn’t erase all your debt. Instead, it’s more like a repayment plan. With Chapter 13, you’ll work out a plan with the court on how to repay your creditors over a period of time. You will continue making partial or full payments, and you’ll need to be under certain debt limits to qualify.
Bankruptcy and Liens on Your Property
When you file for bankruptcy, a lender may still hold a lien on your property. A lien is the lender’s right to take possession of the property if you fail to repay the debt. Even though bankruptcy may forgive some debts, existing liens on your property will still be subject to foreclosure. If you’re current on your loan during bankruptcy, you may be able to reaffirm your loan, but if you’re behind, your lender may work with the court to explore foreclosure prevention options.
Can You Get a Mortgage After Bankruptcy?
The good news is that you can secure a mortgage after bankruptcy—but it takes time and effort. Here’s a breakdown of what you need to know about applying for a mortgage after bankruptcy:
Waiting Periods for Different Loan Types
The waiting period before you can apply for a mortgage depends on the type of bankruptcy and the loan you’re interested in. Here’s a summary:
| Loan Type | Chapter 7 | Chapter 11 | Chapter 12 | Chapter 13 |
|---|---|---|---|---|
| FHA | 2 years | 2 years | Discharged > 2 years | Discharged > 2 years |
| VA | 2 years | 2 years | Discharged > 2 years | Discharged > 2 years |
| Conventional | 4 years | 4 years | Discharged > 2 years | Discharged > 2 years |
| Jumbo | 7 years | 7 years | 7 years | 7 years |
| Home Equity Loan | 4 years | 4 years | Discharged > 2 years | Discharged > 2 years |
Getting a Mortgage While in Bankruptcy
While it’s generally not possible to get a mortgage while still in bankruptcy, some exceptions exist for individuals in a Chapter 13 bankruptcy. If you’ve maintained a 12-month streak of on-time payments and receive court approval, you may qualify for an FHA or VA loan. However, some lenders don’t offer new financing during an active bankruptcy.
Bankruptcy and Your Existing Mortgage
If you already have a mortgage, the way bankruptcy impacts it depends on the type of bankruptcy you file:
Chapter 7 Bankruptcy
In a Chapter 7 bankruptcy, your mortgage will be categorized as either exempt or nonexempt. Exempt means you can keep your property as long as you stay current on your payments. Nonexempt means you could lose your home, but the debt will be wiped out.
Chapter 13 Bankruptcy
With Chapter 13, you may not lose your property. Your repayment plan will include how you intend to continue making your mortgage payments. As long as you remain current on your post-bankruptcy payments, you may be able to keep your home.
How Bankruptcy Affects Your Credit Score
Bankruptcy will have a significant negative impact on your credit score, but the extent of the drop varies. If your credit was already low before filing, the drop may not be as severe. However, for those with higher credit scores, bankruptcy can cause a drastic decline—up to 200 points. On your credit report, bankruptcy can stay for 7-10 years depending on the filing type.
Once you’ve recovered from bankruptcy, it’s important to start rebuilding your credit. Doing so will not only improve your financial health but also increase your chances of securing better loan terms when you’re ready to apply for a mortgage.
Steps to Take Before Applying for a Mortgage After Bankruptcy
Getting a mortgage after bankruptcy is possible, but you need to be prepared. Here are some key steps to help you on your journey:
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Use the Waiting Period Wisely: The waiting period before applying for a mortgage gives you time to set financial goals, reestablish your credit, and prepare a strong mortgage application.
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Rebuild Your Credit: Start by securing a secured credit card or loan, making payments on time, and keeping your balances low. Over time, this will help improve your credit score.
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Prepare Your Story: Be ready to explain why you filed for bankruptcy. Whether it was due to medical debt, job loss, or poor financial decisions, lenders want to understand your situation.
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Stay on Top of Documentation: Lenders will ask for financial documentation, including W-2s, 1099s, and financial statements. Be prompt and thorough when responding to any inquiries.
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Get Preapproved: Preapproval will give you a better idea of what you can afford. It’s important to set a budget that aligns with your financial comfort zone.
Can You Get an FHA or VA Loan After Bankruptcy?
Yes, both FHA and VA loans are available after bankruptcy, though each loan type has its own eligibility criteria and waiting period. For FHA and VA loans, you may be able to qualify 2 years after a Chapter 7 bankruptcy discharge. For Chapter 13, it’s generally 2 years after discharge and 4 years from dismissal.
Mortgage Alternatives to Bankruptcy
Before resorting to bankruptcy, explore other options with your lender. These alternatives may include repayment plans, loan modifications, or payment deferrals to ease your financial burden without damaging your credit long-term. If bankruptcy seems inevitable, work with your lender to find the best path forward.
Final Thoughts: Patience is Key
Bankruptcy isn’t a permanent roadblock to homeownership, but it requires patience and preparation. With time, good financial habits, and proper planning, you can secure a mortgage after bankruptcy. At Avanti Way Financial, we’re here to guide you through the process and help you make informed decisions about your mortgage options. Let’s work together to get you back on track toward homeownership, even after bankruptcy.
