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Can I get approved for a mortgage with a past bankruptcy?

Can I get approved for a mortgage with a past bankruptcy?

Short Answer:

Yes. Many mortgages allow borrowers with a past bankruptcy filing to be approved for a mortgage after waiting a period of time.

Longer Answer:

A bankruptcy doesn't necessarily mean the end of your dreams of owning a home purchased with a mortgage. With the right approach and understanding, you can still get approved for a mortgage.

What are the Different Bankruptcy Types?

First, it’s important to understand the type of bankruptcy you filed:

  1. Chapter 7 Bankruptcy: This involves liquidating your assets to pay off debts and typically stays on your credit report for 10 years.
  2. Chapter 13 Bankruptcy: This involves a repayment plan to pay off debts over three to five years and stays on your credit report for seven years.

What are the Waiting Periods?

Lenders usually require a waiting period after a bankruptcy before you can apply for a mortgage. The waiting periods vary depending on the type of loan:

  • Conventional Loans: Typically, you need to wait four years after a Chapter 7 discharge and two years after a Chapter 13 discharge.
  • FHA Loans: The waiting period is usually two years after a Chapter 7 discharge and one year after a Chapter 13 discharge, provided you have made 12 months of on-time payments and received court approval.
  • VA Loans: For veterans, the waiting period is two years after a Chapter 7 discharge and one year after a Chapter 13 discharge.
  • USDA Loans: The waiting period is three years after a Chapter 7 discharge and one year after a Chapter 13 discharge.

How to Rebuild Your Credit After a Bankruptcy?

During the waiting period, focus on rebuilding your credit. Here are some steps to take:

  1. Pay Bills on Time: Consistently paying your bills on time is crucial for improving your credit score. Add all your debts to auto-pay where the minimum payment required is taken out on the date owed if it has not already. This will avoid any new 30-day late payments.
  2. Reduce Debt: Work on paying down existing debts to lower your debt-to-income ratio.
  3. Secure a Secured Credit Card: Using a secured credit card responsibly can help rebuild your credit.
  4. Monitor Your Credit Report: Regularly check your credit report for errors and dispute any inaccuracies.

Lenders like to see no new negative information on the credit report from the date of your bankruptcy until your application.

Saving for a Down Payment

A larger down payment can improve your chances of getting approved for a mortgage. The more down payment you have, the lower your mortgage making you a less risky borrower. In addition, more money to purchase a home equals more options.

What Documents are Needed for Pre-Approval with a Bankruptcy?

Before house hunting with a past bankruptcy, get pre-approved for a mortgage. A copy of your bankruptcy discharge order must be submitted with your other income and assets documentation. Your lender should review your credit report vs the discharge order to make sure all the information is being reported correctly. If you are in Chapter 13 Bankruptcy, the lender will require proof you have made 12 on-time payments, the amount needed to be paid monthly, which will be added to the debt, and permission from the bankruptcy trustee allowing you to purchase a home.

Conclusion

While a past bankruptcy can pose challenges, it doesn’t make getting a mortgage impossible. The mortgage process may be a little harder and more documentation will be required to be submitted. In reality, it is more of a bump in the road to homeownership vs a dead end.

These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact me.

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