After Chapter 7 Bankruptcy it may feel as though you will never be able to afford a large purchase again. This can be very scary but it is not true. There are a few things you can do to increase your credit score and eventually make those large purchases with credit again. Use these tips to help your own personal situation and realize your dream of home ownership. You can apply for a mortgage loan two to four years after you have gotten your discharge paperwork so start on these tips now.

Waiting Periods for Specific Types of Loans

Before you begin looking for a home loan, there is one thing you must do. You must ensure that the judge has discharged your bankruptcy case. Without that discharge, it’s unlikely that you will even come close to qualifying for a mortgage. After the discharge is an exercise in patience with the timeframe dictated by the kind of bankruptcy you filed and the type of mortgage loan you are hoping to get.

With Chapter 7 bankruptcy, most of your unsecured debt is completely wiped off the slate. However, that causes the most negative impact on your credit report because it says to creditors that you didn’t pay your debts but rather had the court eliminate them. Once your Chapter 7 case is discharged, lenders will insist on a specified waiting period.

Many lenders call the waiting period between Chapter 7 discharge and the ability to apply for a mortgage a “seasoning period.” These waiting periods vary based on the type of loan you seek, and those are as follows:

• Those seeking a conventional loan will have a four-year waiting period before they are eligible to apply.
• Those applying for a USDA loan must patiently wait three years.
• People who want a VA or FHA loan must wait a minimum of two years before applying.

Chapter 7 bankruptcy affects your credit score to a greater extent than a Chapter 13 filing because Chapter 13 includes a repayment plan. Subsequently, some waiting periods are shorter for those who filed Chapter 13 versus those who filed Chapter 7 proceedings. For those who filed Chapter 13, their waiting period is calculated from the date you filed for bankruptcy, provided the bankruptcy was discharged rather than dismissed. Chapter 7, on the other hand, has a waiting period that begins with the discharge date.

Beware if you’ve filed multiple bankruptcies within seven years. Filing bankruptcy more than once increases the minimum waiting period to five years. That timeframe could be reduced to three years if there were extenuating circumstances that you can prove.

Tips for Improving Your Chances of Qualifying for a Mortgage After Bankruptcy

While bankruptcy is something of a reset for your financial life, it doesn’t reset your credit score nor guarantee smooth sailing moving forward. There are common sense tips for improving your economic life and, therefore, your chances of qualifying for a mortgage loan after a discharged bankruptcy. One of the best steps you can take is to address your financial situation before you file bankruptcy to help you have a higher credit score going into the process, so your score will be higher when you come out the other side.

Other tips fall under the category of getting and keeping your financial house in order following the bankruptcy. Let’s look at those tips.

Create a Budget

Before considering applying for a mortgage, you should create and live within a budget. Determine which items are must-haves and which ones are considered discretionary. Build savings into the budget anywhere possible. Learn where you overspend and eliminate those issues to avoid the pitfalls that originally led to filing bankruptcy.

Work on Your Credit

Bankruptcy can really hurt your credit and in order to get a mortgage loan, you will need to have good credit. You should start building your credit now by getting a small loan and paying it off or by getting a secure credit card. It can be difficult to get approved for loans so soon after bankruptcy but you should consider a small personal or payday loan and paying it off quickly to establish your initial credit. Then, even if you cannot get a traditional credit card, you should get a secured one where you put the money on the card and use it like a debit card. The only difference is that you will use the card like a credit card and pay it back every month.

Use Credit Cards with Care

It can be exciting to see credit card offers coming in again after you’ve been discharged from bankruptcy. However, you need to be aware that banks will often charge you higher interest rates and fees because of your past bankruptcy. Make sure you read all the details and pay attention to the fine print in any offer of credit. Use the cards sparingly, and only purchase items you can pay off the following month to rebuild your credit.

Consider Getting an Auto Loan

It can sometimes be easier to obtain a car loan than a mortgage. Getting a car loan can be a way to re-establish and build credit. However, be careful not to overload yourself with debt because that’s what led to filing for bankruptcy in the first place.

Save Up for a Down Payment

Another thing you will need to buy a house is a down payment. You should start saving now as much as possible to make things easier when it is time to purchase. You should try to save at least 20% of the home value for your down payment, which can take some time. You may even want to consider setting up an automatic transfer of funds to a savings account to ensure this happens.

Write a Letter of Explanation

Mostly, mortgage lending is cut-and-dried; you meet the criteria or don’t. However, mortgage lenders have had their share of ups and downs, even if they’ve never filed for bankruptcy personally. An idea for helping you with the mortgage approval process is writing a letter of explanation to the lender that tells them what led to your bankruptcy. The letter should also detail your steps to regain control of your finances and keep them under control. Sometimes, these letters can tip the scales in your favor when obtaining a mortgage.

Shop for Pre-Approval

Before you purchase a house, find out what your spending power is. One way to do that is to obtain pre-approval. A pre-approval is when a mortgage lender says a borrower can get a specified loan amount for a home. Knowing your pre-approval amount helps you stay within a budget and tells the seller you are ready to purchase a home. Be aware that it can be harder to get pre-approved after bankruptcy.

Consider a Co-Signer

Even with building your credit and having the down payment ready to go, you may still run into some issues. You can consider getting a co-signer for the loan to help with approval. Having your name on the loan will help to continue rebuilding your credit, even with a co-signer.

What Kind of Mortgage Can You Get After Chapter 7 Bankruptcy?

If we’re being technical, you can qualify for any mortgage after bankruptcy. Some of them have specific waiting periods that are longer than other waiting periods. Once you’ve waited the appropriate length of time and think you meet the other qualifications for the loan, you can apply.

With that said, FHA loans may be the easiest to obtain after bankruptcy. The waiting period is shorter, and they typically have lower credit requirements. The lower credit requirements matter because a Chapter 7 bankruptcy will continue to show on your credit report for ten years. It’s possible to have an FHA loan approved with a credit score as low as 580, and a larger down payment—10% or more—could mean qualifying with a score as low as 500.

Conventional loans, on the other hand, require that your credit be re-established. That means you will need to pay all your bills on time to show a new, healthy pattern of handling credit after you’ve been discharged from bankruptcy. Usually, the minimum credit score for a conventional loan is 620.

VA loans are specifically for veterans, and their credit history requirements can usually be more lenient. USDA loans are for homes that are in qualified rural areas. Qualifying for these loans requires a specified income as well as a credit score of 640 or higher. Your income must be less than 115% of the average income in the area, and you need to work to boost your credit score before applying.

Another mortgage option is known as a non-qualified mortgage. These mortgages are riskier because they fall outside federal mortgage guidelines. These loans typically don’t have a waiting period, but they should be considered a last resort for those who can’t qualify for any other mortgage option. Some of the features of a non-qualified mortgage include the following:

• Interest-only payments that don’t build equity in the home.
• Balloon payments require a large amount of money to be set aside to meet the payment.
• A loan term that lasts more than 30 years.

Whom to Call When You Face Bankruptcy

Navigating life after bankruptcy can be stressful but with these tips, you can have a successful experience. Contact a bankruptcy attorney at Morgan Lawyers today for more information or if you are considering filing for bankruptcy.

Related Content: What happens when you file chapter 7 bankruptcy

Original article revised on Jan 13, 2023