Mortgage after Bankruptcy

Bankruptcy can happen to anyone… and now, it’s happened to you. However, it’s been a while since you filed, you’ve established some credit, and now you want to buy a home. Is it possible to get a mortgage after bankruptcy?

The good news is, yes, it is possible. The bad news is, certain conditions apply.

Back in the day, any bankruptcies on your record meant that any dreams of a mortgage after bankruptcy should be kept in their place of origin: your head. Lenders wouldn’t even look at your application until a minimum of ten years had elapse between the time you cleared your bankruptcy, and the time when you could apply for a mortgage and maybe get your application looked at. These days, however, mortgage after bankruptcy is no longer such an oxymoron. You do have options, as long as you meet the requirements.

Generally, bankruptcies are one of two categories: Chapter 7, and Chapter 13. A Chapter 7 bankruptcy purges all your previous debts, while a Chapter 13 bankruptcy reaches a payment arrangement with your lenders so that you can pay your lenders an established sum over time. Lots of lenders view both bankruptcies in the same light—that is, both bankruptcies require that two conditions be met:

  1. A period of 2 to 4 years passes between the point where you have paid off and/or wiped out your debts, and the point where you apply for a mortgage after bankruptcy.
  2. New credit must have been established.

As a general rule, you’ll be hard-pressed to find a lender willing to approve you for a mortgage after bankruptcy as you’re still in the process of repaying your Chapter 13 agreement. These lenders will probably be under the assumption that you should not be out house-hunting while you’ve still got outstanding debts. Lenders who are willing to give out a mortgage after bankruptcy might not offer you the most competitive mortgage offers they have available.

As another general, very important rule, do NOT underestimate the importance of re-establishing credit. Some people think that getting a bankruptcy dismissed, then sitting around and waiting for two years is good enough to qualify for a mortgage. These people are in for a rude awakening when the two-year period is up, and their application gets rejected. Lenders will want evidence that you are capable of making payments on time. This evidence must come from multiple sources.

New credit illustrates to your lender that, since clearing your bankruptcy, you have developed strategies to effectively handle your money and manage credit accounts. The majority of mortgage loans after bankruptcy necessitate that you set up a minimum of three (preferably four) new credit accounts. These accounts must show that you have purchased on credit and made payments on time without fail for a period of at least two years. These accounts must also be on top of rent payments to your landlord.

Ways to establish new credit after bankruptcy include using secured credit cards, and providing proof of regular payments for at least one year. Once this year is up, you can request clean credit reference letters. These letters should come from anyone to whom you give routine monthly payments. Examples include:

  • auto insurance provider
  • home telephone provider
  • pager or cel/mobile phone service provider
  • internet provider
  • cable television provider
  • water provider
  • gas and/or electricity provider

Remember, the more clean credit references you can provide, the better.