Debt levels have surged recently, with total household debt in the U.S. reaching $17.69 trillion by the end of the first quarter of 2024, as reported by the Federal Reserve Bank of New York. Paying off debt has become more challenging due to inflation and high interest rates, which are driving up both debt and the cost of living.
When debt becomes unmanageable, some people turn to bankruptcy for relief. In 2023, 434,064 non-business bankruptcy filings were recorded, marking a 16% increase from the previous year, according to the Administrative Office of the U.S. Courts.
When debt becomes unmanageable, some people turn to bankruptcy for relief. In 2023, 434,064 non-business bankruptcy filings were recorded, marking a 16% increase from the previous year, according to the Administrative Office of the U.S. Courts.
"Bankruptcy can provide a fresh start, but it doesn't always erase all financial burdens," says John Ulzheimer, a credit expert. "The impact on your credit can be significant, but with dedication, you can rebuild your financial standing."
Indeed, it takes time and effort to recover from bankruptcy, but it is possible to regain financial health and even qualify for substantial loans, like a mortgage. So, how does one go about securing a mortgage after bankruptcy?
Indeed, it takes time and effort to recover from bankruptcy, but it is possible to regain financial health and even qualify for substantial loans, like a mortgage. So, how does one go about securing a mortgage after bankruptcy?
While you might not qualify for a mortgage immediately following a bankruptcy, it's definitely a goal you can work towards.
"Bankruptcy is a financial setback, but it doesn't mean you can't get a mortgage," says Greg McBride, Chief Financial Analyst at Bankrate.
However, the type of bankruptcy filed significantly affects your ability to qualify for a mortgage.
"After filing for Chapter 7 bankruptcy, which discharges most debts, it typically takes about two to three years for a borrower’s credit to recover enough to qualify for a conventional mortgage. For Chapter 13 bankruptcy, where debts are repaid over three to five years, recovery can be as quick as one year," explains Bruce McClary, Senior Vice President of Communications at the National Foundation for Credit Counseling (NFCC).
The type of loan you're applying for also plays a critical role, particularly with government-backed mortgages, which have specific waiting periods.
"Lenders and loan investors impose a seasoning period, which is the minimum time required between the bankruptcy discharge and mortgage eligibility," says McBride.
For instance, Fannie Mae and Freddie Mac, two large government sponsored enterprises (GSEs) that guarantee most of the mortgages in the US, typically require a four-year waiting period after a Chapter 7 bankruptcy, while the Federal Housing Administration (FHA) usually requires two years, adds McBride.
For Chapter 13 bankruptcies, the rules are more lenient. "You may qualify for an FHA loan after one year of making on-time payments and with court approval," McClary notes.
How Bankruptcy Impacts Your Mortgage Eligibility
While you may become eligible for a mortgage after a specific waiting period, the criteria for qualifying can vary by lender following a bankruptcy.
"Lenders often require a larger down payment post-bankruptcy, typically between 10% and 20%," explains David Reischer, attorney and CEO of LegalAdvice.com.
"Lenders often require a larger down payment post-bankruptcy, typically between 10% and 20%," explains David Reischer, attorney and CEO of LegalAdvice.com.
In addition to potentially paying more upfront, your costs might also be higher because lenders may charge higher mortgage interest rates. "Interest rates for borrowers with a bankruptcy history are generally higher than those with clean credit histories," notes Reischer.
However, you shouldn't assume that you have to accept whatever mortgage rates come your way. While your options might be a bit slimmer and more expensive after bankruptcy, you can still find lenders willing to offer competitive interest rates.
"Even with a bankruptcy on your record, it's possible to shop around and find lenders who won't charge excessively high rates," advises John Ulzheimer, a credit expert and president of The Ulzheimer Group. "Be cautious of lenders who exploit your situation by offering rates that are significantly above market."
"Even with a bankruptcy on your record, it's possible to shop around and find lenders who won't charge excessively high rates," advises John Ulzheimer, a credit expert and president of The Ulzheimer Group. "Be cautious of lenders who exploit your situation by offering rates that are significantly above market."
Additionally, be mindful of services that promise to repair your credit quickly. "Beware of credit repair companies making unrealistic promises and charging high fees," warns Ulzheimer. "Rebuilding credit takes time and consistent effort."
How to Boost Your Chances of Qualifying for a Mortgage After Bankruptcy
While bankruptcy can make securing a mortgage more challenging, there are steps you can take to become a more attractive mortgage applicant post-bankruptcy.
First and foremost, it's crucial to address any debts that survive the bankruptcy and ensure you are in good standing on your payments. "Clearing up any remaining debts and maintaining consistent payments is essential," says Linda Davis, a financial advisor at BrightPath.
First and foremost, it's crucial to address any debts that survive the bankruptcy and ensure you are in good standing on your payments. "Clearing up any remaining debts and maintaining consistent payments is essential," says Linda Davis, a financial advisor at BrightPath.
Use the waiting period to improve your financial situation.
"During this time, focus on rebuilding your credit by managing your finances responsibly, paying your bills on time, and keeping your credit balances low," advises Bruce McClary, Senior Vice President of Communications at the National Foundation for Credit Counseling (NFCC). "Showing lenders that you've adopted better financial habits can significantly improve your mortgage eligibility."
Additionally, the waiting period can be beneficial, as it allows you more time to save for a larger down payment, which can help you secure better mortgage rates.
"Building up a larger down payment can greatly enhance your mortgage application by reducing the lender's risk," says Greg McBride, Chief Financial Analyst at Bankrate. "Working with a mortgage broker experienced in assisting clients with previous credit issues can also provide you with tailored advice and support."
By focusing on these strategies, you can improve your odds of qualifying for a mortgage even after experiencing bankruptcy.
By focusing on these strategies, you can improve your odds of qualifying for a mortgage even after experiencing bankruptcy.
Key Takeaway: Improving Your Mortgage Eligibility After Bankruptcy
Although bankruptcy can complicate the process of obtaining a mortgage, it's possible to qualify for one with time and effort. Initially, it's crucial to address any surviving debts and maintain good payment standing. During the waiting period, focus on rebuilding your credit by managing finances responsibly, paying bills on time, and keeping credit balances low. This period also provides an opportunity to save for a larger down payment, which can improve your mortgage terms. By adopting these strategies and demonstrating sound financial behavior, you can enhance your chances of securing a mortgage post-bankruptcy.