Getting a Mortgage After Bankruptcy: What to Know

Families choosing bankruptcy as relief from major financial struggles can luckily look to the future with hope. Many might think that a particularly cherished goal, home ownership, might seem to be beyond their grasp after filing. However, qualifying for a mortgage post-bankruptcy is very much a possibility. But what’s involved with getting a mortgage after bankruptcy and how long do you have to wait? Find out here.

How Long After Bankruptcy Can You Get a Mortgage?

Depending on the type of bankruptcy, a filer can expect to be able to apply for a mortgage within as little as one year.

Generally, Chapter 13 bankruptcy filers are eligible for a VA or FHA mortgage loan one year after filing for bankruptcy and two years for a conventional loan.

Filing for Chapter 7 bankruptcy can leave the filer in a somewhat different situation regarding credit. After Chapter 7 bankruptcy, the waiting period for FHA or VA eligibility is typically two years. The wait for a conventional loan is typically four years.

Rebuilding Credit

In order to maximize the chances of getting a mortgage after bankruptcy it is necessary to manage finances scrupulously. A representative of the National Foundation of Credit Counseling recommends the following actions for individuals looking to rebuild their credit after bankruptcy:

  • Open bank accounts, including both checking and savings, and avoid any overdrafts.
  • Obtain a credit card, even if it has to be a secured account with a low limit, and keep the balance paid off.
  • Build up savings by regularly putting aside at least 10 percent of take-home pay.
  • Make rent and utility payments on time.

Following this advice will enable consumers to rebuild their financial creditworthiness moving forward.

It is true that some credit scores go down due to bankruptcy, but the effects diminish as time passes. In some situations, it takes much less time to get back a decent score than people think. However, the better a person takes care of financial affairs, the more the credit score will improve, and the better the interest rate will be when eventually qualifying for a mortgage.

Making Rent Work for the Borrower

Rent payments are a very important part to rebuilding consumers’ credit scores. The FHA has come to rely on a prospective borrower’s rent payment history more and more. It now evaluates eligibility for credit based primarily on payments for housing, even prioritizing rent above consumer credit and installment loan payments.

A bad record of failing to pay rent on time has been affecting credit scores for a long time. Only recently have positive rent payment histories begun to show up on credit reporting companies’ radar. One such company, Experian, began regularly tracking rental payment history in January 2011.

With banks now eyeing mortgage applicants’ rent payment histories more closely, bankruptcy filers who want to own a home should be very strongly motivated to keep rent paid up, on time.

Get Expert Advice on a Mortgage After Bankruptcy

For those still wrestling with a decision on whether to file bankruptcy, it is important to have accurate information about the effects of bankruptcy, such as its impact on future home ownership. A knowledgeable attorney is an essential resource. Anyone looking into bankruptcy can bring questions to our Cincinnati-based bankruptcy attorneys and feel confident in determining the best course to take.