Can I Get a Mortgage After Filing for Bankruptcy?

In This Article

Disclaimer: The views, thoughts, and opinions expressed in this article solely belong to the author and are given from the perspective of a real estate investor. They are not intended to be legal advice. You should always consult your attorney and/or other professional advisor when it comes to bankruptcy.

Even though we have a robust economy and unemployment rates are at historic lows, individuals and businesses are still filing for bankruptcy. Thankfully, the rate of bankruptcy filings has declined substantially since the 2010 peak, when nearly 1.6 million bankruptcies were filed. In fact, the rate of total U.S. bankruptcy filings for 12 months ending September 2019 was 776,674—almost half the 2010 amount. [1]

The prospect of going bankrupt is frightening and something most want to avoid at all costs. But bankruptcy doesn’t have to be the end of the financial road. In fact, it can be a useful tool to help both individuals and businesses get a financial fresh start.

Can You Get a Loan After Bankruptcy?

One concern that individuals who have filed for bankruptcy have is whether they will ever be able to borrow again. In this article, I’ll take a closer look at the answer to that question. It depends in part on the specific circumstances, including the type of bankruptcy filed.

There are six types of bankruptcy, but this article will focus on the two most common: Chapter 7 and Chapter 13. Before I dive into the different options for getting a mortgage loan after bankruptcy, it is helpful to provide some context with a quick overview of Chapter 7 and Chapter 13.

What Is Chapter 7 Bankruptcy?

Chapter 7, also known as liquidation bankruptcy, is the most common form for individuals. This type of bankruptcy is structured for those who do not have the ability to repay debts. In a liquidation bankruptcy, most of the debtors’ property is sold and used to pay off debts.

What Is Chapter 13 Bankruptcy?

Chapter 13 is also known as a reorganization bankruptcy. A Chapter 13 bankruptcy is structured for those who have the means to repay debts but need time and a plan to do so. Under Chapter 13, a court-mandated repayment plan is established, and the debtor can often keep their property if it is carried out successfully.

When it comes to borrowing after bankruptcy, Chapter 13 debtors will have to wait longer to get a “financial fresh start,” as they must first successfully complete their repayment plan. This may take up to five years.

Those filing for Chapter 7 bankruptcy can get a fresh start sooner, as there is no repayment plan to satisfy—but they usually lose their property.

Related: BiggerPockets Money Podcast 50: Rebuilding Your Financial Life After Bankruptcy with Patrice Washington

When to File for Bankruptcy

The reasons an individual files for bankruptcy can factor into the future prospects of obtaining a loan and the post-bankruptcy waiting period required by lenders. Some of the more common reasons individuals file for bankruptcy are listed below. [2]

Medical expenses are a big one. Even though there have been recent attempts by the government to address this issue, serious and chronic medical conditions are still the main reason individuals file for bankruptcy. In fact, two-thirds of people who file for bankruptcy cite medical issues as a key contributor to their financial downfall. [3]

Other reasons may include:

• Inability to make home mortgage payments or foreclosure
• Spending or living beyond one’s means
• Providing financial assistance to friends or relatives
• Student mortgage loans
• Divorce or separation

However, there is good news…

Bankruptcy Isn’t the End of the Road

Being forced or choosing to file for bankruptcy can be demoralizing, but it isn’t the end of the road. One can get a financial fresh start after bankruptcy. You can even get a mortgage after a waiting period by taking the right steps.

The following table shows some of the more readily available options and waiting periods.

Waiting Period After Filing Chapter 7 and Chapter 13

NOTE: If you went through both a foreclosure and bankruptcy around the same time (which is common), there are more steps that may be needed prior to being eligible for a conventional, FHA, or USDA mortgage loan. It is always a good idea to check with your potential lenders.

Other Loan Options Post-Bankruptcy

Hard Money Loans

Hard money lenders may be willing to lend to individuals with a bankruptcy on their record. Their willingness will depend on several factors, including the amount of risk they are willing to take and the opportunity associated with the property.

In most cases, you’ll still have to wait until your bankruptcy discharges before a hard money lender will consider lending to you.

Related: 5 Options for Investing in Real Estate With Bad Credit

Bank Statement Mortgage Loans

Bank statement mortgage loans, also known as self-employed mortgages, allow you to secure a mortgage without the documentation you would normally use to verify your income (such as W-2s and tax returns).

If you have gone through a bankruptcy, it may be difficult to come up with the required documentation, particularly if you are a self-employed real estate investor. Under these circumstances, bank statement loans may be a good alternative.

You’ll use 12 to 24 months of bank statements to present your financial picture and ability to repay. Bank statement loans often allow high debt-to-income (DTI) ratios and high mortgage loan limits. They can be used on primary residences, second homes, and investment properties.

Non-Prime Mortgage Loans

The exact requirements to get a non-prime mortgage loan vary from lender to lender, but these loans often do not require waiting periods after bankruptcy. They are also more lenient on credit score requirements.

Conclusion

Hopefully, you never need to use the information in this article. However, if life throws you a curveball and you end up filing for bankruptcy, don’t despair. In most cases, you will be able to get a financial fresh start—including a mortgage loan.

References

[1] https://www.uscourts.gov/news/2019/04/22/bankruptcy-filings-continue-decline

[2] https://www.cnbc.com/2019/02/11/this-is-the-real-reason-most-americans-file-for-bankruptcy.html

[3] https://www.cnbc.com/2019/02/11/this-is-the-real-reason-most-americans-file-for-bankruptcy.html

Other questions about bankruptcy? Or have you successfully secured a loan post-bankruptcy? Which type?

Let’s talk in the comment section below. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.