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Mortgage after bankruptcy in 2019: qualifying after financial setbacks

Gina Pogol
The Mortgage Reports contributor

In this article:

When you file for bankruptcy, whether it’s a Chapter 13 or 7, it will affect your future mortgage qualifying. But not forever. Here’s what you need to know about qualifying for a mortgage after bankruptcy.

  • How does the type of bankruptcy affect my mortgage qualification?
  • What factors can shorten my waiting period?
  • What factors can increase my waiting period?

Bankruptcy can mean a fresh start. And, thankfully, it doesn’t mean the end of the road for getting a mortgage.

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Chapter 7 versus Chapter 13 bankruptcies

Mortgage lenders treat Chapter 7 (liquidation) bankruptcies differently than they do Chapter 13 (reorganization) bankruptcies. In most cases, Chapter 7 filers get harsher treatment than Chapter 13 filers. That’s because Chapter 13 filers repay some or all of what they owe over time, while Chapter 7 filers discharge their debts immediately.

But it’s possible to get a mortgage after bankruptcy regardless of the type of filing.

Bankruptcy discharge vs dismissal

There are two ways that a bankruptcy can end. You can jump through all the hoops, pay whatever you’re supposed to pay, and receive a discharge. That means your creditors have to write off any unpaid amounts once the court grants your discharge.

In a Chapter 7, that means you gave up whatever assets the court required, and you get a “clean slate” with no debt (except ineligible accounts like government-backed student loans). And you are eventually eligible for a mortgage after bankruptcy.

In a Chapter 13, that means you made all of your court-required scheduled payments into your plan (usually over five years), and your creditors had to write off any remaining balances. You don’t even have to wait for your bankruptcy discharge to get a mortgage when you file Chapter 13.

The other ending is a bankruptcy dismissal. A dismissal happens when you decide to withdraw your filing, or because you did not make the plan payments as required, or provided false information to the court. Lenders treat dismissals more harshly than discharges in many cases. You are not technically getting a mortgage after bankruptcy, because a dismissal means that there is no bankruptcy.And you lose your protection from creditors.

FHA and VA standard loan requirements

Both FHA and VA guidelines carry similar standard waiting periods for mortgage after bankruptcy. These can change depending on your circumstances (see below for special cases).

Related: What is the real credit score needed to get an FHA mortgage?

You can apply for an FHA loan or a VA mortgage after your Chapter 7 bankruptcy has been discharged for two years.

Chapter 13 bankruptcies are viewed a bit differently. FHA and VA allow homeowners to apply for a mortgage while they are actually still in bankruptcy. At least one year must have passed since filing, and applicants must have made at least 12 on-time bankruptcy payments. The bankruptcy court or trustee must also approve the new mortgage.

USDA standard loan requirements

In most cases, you can apply for a USDA home loan after your Chapter 7 bankruptcy has been discharged for three years (see below for special cases).

USDA home loans: credit score eligibility

As with other government-backed loans, you can apply for a USDA mortgage after bankruptcy filing. You don’t even have to complete your payment plan, just make at least 12 timely payments. You’ll also need written permission from the bankruptcy court.

Conforming mortgage loan requirements

Fannie Mae and Freddie Mac — the national rule-makers for conforming loans — allow Chapter 7 filers to  apply for a Fannie Mae or Freddie Mac mortgage after bankruptcy. But the wait is four years after their discharge or dismissal (see below for special cases).

The waiting period for Chapter 13 bankruptcies is two years. But this is two years after discharge, not filing. Since Chapter 13 bankruptcies typically take five years to discharge, your total waiting period under a conforming mortgage program would be seven years from the filing date.

How to re-establish credit after bankruptcy

Regardless of the type of mortgage for which you’re applying post-bankruptcy, there are a number of steps you can take to begin repairing your credit right away.

Establish new credit via “second chance” credit cards and installment loans, and make on-time payments on all credit accounts. Avoid “fee harvesting” cards with high costs, and only use accounts that will actually report your history to major credit bureaus.

Related: 3 ways to raise your credit score fast in 2019 and save on everything

If you’re renting, you may be able to get your rental history into your credit report. Underwriters will look very closely at how you’ve paid your bills since your bankruptcy.

Make all of your payments — on everything — in a timely manner; especially housing-related payments such as your rent or mortgage.

Finally, if you have close friends or relatives with excellent credit, ask them to add you as an authorized user on their accounts. This will transfer their good payment history to your account and improve your credit score.

Special cases: getting a mortgage after bankruptcy

Not everyone has a textbook case with an easy answer. Some applicants can achieve mortgage approval sooner than the prescribed waiting periods. They have what are called in the mortgage industry “mitigating” or “extenuating” circumstances. These are events beyond your control that caused your bankruptcy.

Others have issues that can lengthen the waiting time to get a mortgage after bankruptcy. Here are a few specifics.

My bankruptcy was not my fault. Can I get a mortgage sooner?

Almost all mortgage programs make allowances for applicants whose bankruptcy was not due to financial mismanagement. They refer to this kind of circumstance as “mitigating” or “extenuating” and it can shorten your waiting period considerably. To get this privilege, though, you can’t just be a victim of bad luck.

You have to show that you are back on your feet, financially, and that the problem causing your bankruptcy was a one-time thing and unlikely to recur.

Here is a list of reasons that lenders might consider mitigating or extenuating:

  • Loss of a job (due to company shutdown or mass layoff)
  • Death of the primary wage earner
  • Serious illness

FHA and USDA lenders do NOT consider divorce an extenuating circumstance. Nor is the inability to sell your home following a job transfer or relocation to another area. Fannie Mae does allow it, but a divorce or other reason must be the cause of extreme financial hardship.

For instance, if the primary wage-earner abandoned the household and took off with all the savings, that’s a divorce-related hardship. The fact that you spent the mortgage money to hire a really expensive divorce lawyer probably won’t get you much sympathy from underwriters.

How does it work with a Chapter 13 dismissal?

When you go through a Chapter 13 bankruptcy, you make monthly payments over several (usually five) years. If you fail to make the payments as agreed, the bankruptcy may be dismissed. In that case, you lose all the protection of a bankruptcy filing, and your creditors can go after you in court.

Related: How to get a mortgage after a Chapter 13 bankruptcy?

You may also receive a dismissal if you decide that you don’t want to do the payment plan and withdraw your filing.

Conforming lenders treat dismissals of Chapter 13 bankruptcies more strictly than discharges. That is because, if you go through the entire five years and receive your discharge, you still have to wait another two years before you can get a conforming mortgage. That is a total of seven years form your filing date.

If you get part-way through and then withdraw your claim or receive a dismissal, Fannie Mae and Freddie Mac extend your waiting period to four years. They believe that this rule is more fair to those who stick out the entire Chapter 13 repayment period.

What about multiple bankruptcies?

The government-backed mortgages (USDA, VA and FHA) do not mention multiple bankruptcies in their guidelines. Conforming loan underwriting does consider them, however, if you file more than once during the most recent seven years. The guidelines read:

“For a borrower with more than one bankruptcy filing within the past seven years, a five-year waiting period is required, measured from the most recent dismissal or discharge date.”

But those with documented extenuating circumstances get a break. The extenuating circumstances must apply to the second bankruptcy. because it would be pretty hard to prove that the problem is unlikely to recur if it already has. Fannie Mae says:

“A three-year waiting period is permitted if extenuating circumstances can be documented, and is measured from the most recent bankruptcy discharge or dismissal date. The most recent bankruptcy filing must have been the result of extenuating circumstances.”

I have a bankruptcy and a foreclosure. How does that work?

It is not uncommon to be going through bankruptcy while also having a mortgage. You may choose to reaffirm the mortgage (agree to keep making payments) and keep the property. Or you may choose to include the mortgage in the bankruptcy. In that case, your obligation to the mortgage lender ends, and so do your rights to occupy the property.

However, it can take some lenders years to actually foreclose on these homes. Should you be afraid of restarting the clock if your bankruptcy waiting period is up, and then the lender finally forecloses?

If you did not reaffirm your mortgage and did not continue to make payments, but did continue to live in the home, that foreclosure will probably be considered a separate and later event. And your wait to buy again starts over, and it will be longer.

If you can’t pay your mortgage when you go through bankruptcy, make sure it’s included in the bankruptcy and you agree to return the property to the lender. If the bankruptcy documents absolve you of responsibility for the mortgage, the lender applies the shorter post-bankruptcy waiting period when you apply for a new loan.

But if the foreclosure is unrelated to the bankruptcy and occurs later, the lender applies the longer post-foreclosure waiting period. In the case of a conforming lender, that’s seven years — following the actual foreclosure, not the bankruptcy. (Extenuating circumstances shorten that to three years,)

For government-backed loans, the waiting period following a foreclosure depends on the loan that was foreclosed. If the foreclosed loan was also government-backed, it generally takes three years to get off the CAIVRS database, which tracks everyone who owes the government money. That includes a government-insured mortgage or student loan.

Verify your new rate (May 23rd, 2019)