How Bankruptcy Affects Your Mortgage: A Guide

If you find yourself in deep enough financial trouble, bankruptcy may be your only avenue for relief. If you have to go this route, know you’re not alone. For the 12 months ending September 2024, there were 489,958 filings in U.S. Bankruptcy Court where someone might be held personally liable for debt.

What’s The Difference Between Chapter 7 And Chapter 13?

Before we get too deep into the details about mortgages and bankruptcy, let’s go over the basics of the most used options so that you can understand them better.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is also known as total bankruptcy. It wipes out much (or all) of your outstanding debt. In exchange, you may be forced to sell or liquidate some of your property to pay back your debts. Chapter 7 is also called “straight” or “liquidation” bankruptcy. This bankruptcy option directly forgives your debts (with some exceptions).

The downside is that you must give up assets included in the bankruptcy. Also, not everyone qualifies. You have to meet income limits or pass a means test.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is more like a repayment plan and less like a total wipeout. With Chapter 13, a borrower files a plan with the bankruptcy court detailing how they plan to repay creditors. Borrowers make partial or full debt payments based on what they can afford. You can’t have more than $465,275 of unsecured debt and $1,395,875 in debt secured by collateral, like a home or car, to qualify.

Liens And Bankruptcy

Liens play role in bankruptcy proceedings and when a lender might have a right to foreclose on a home. When a lender lets you borrow money to buy a property, it places a lien on that property. A lien is a right or interest in the property that the lender has until the debt (or loan) is paid in full. Even though some debts are forgiven during bankruptcy, existing liens on your property are still subject to foreclosure.

Can You Get A Mortgage After Bankruptcy?

Yes, it’s possible to get a mortgage after bankruptcy. You can refinance or buy a house after bankruptcy if you meet the other qualifications. Depending on the bankruptcy type, with some nonconforming loans – like those from government agencies – you may not even have a waiting period.

Can You Get A Mortgage While In Bankruptcy?

The short answer to this question is usually no. All major lenders and mortgage investors require that the bankruptcy be either discharged or dismissed before application. Many loan types require a waiting period before you can even apply.

However, you may still be able to qualify for a mortgage while going through a Chapter 13 bankruptcy with FHA or VA loans provided you’ve maintained a record of 12 consecutive months of on-time payments and receive approval from the court. Since we want to make sure you’re ready before applying for a new home loan, Rocket Mortgage® doesn’t do new financing while you’re going through the bankruptcy process.

How Long Do I Need To Wait After Bankruptcy To Get A Mortgage?

Each type of loan has a different waiting period after bankruptcy based on the type of filing. Lenders may also have their own rules. Check in to see when you qualify. Although we’ve talked exclusively about Chapter 7 and Chapter 13 bankruptcies up to this point, two others that you should know about are Chapters 11 and 12. Chapter 11 affects self-employed people, while Chapter 12 is for family farmers and fishermen.

The following table shows waiting periods for loans through Rocket Mortgage:

Filing Bankruptcy With A Mortgage

There are established procedures of due process for bankruptcy. You don’t automatically lose your house. Filing for bankruptcy also does not automatically accelerate the loan or make it due immediately, as long as you have been making payments on time up to that point. Even if your mortgage isn’t included in the bankruptcy, your lender or servicer is told and must follow certain rules in their interactions with you.

How Does Chapter 7 Bankruptcy Affect My Existing Mortgage?

When you file Chapter 7, your existing property will be deemed exempt or nonexempt. Exempt means you’ll be able to keep the property throughout the bankruptcy process, as long as you can catch up and stay current on your payments. If you mortgage is nonexempt as part of the bankruptcy, your debt is wiped away, but you won’t be able to keep your house.    

What About Chapter 13? What Happens With My Existing Mortgage?

With a Chapter 13 bankruptcy, you may not lose your property. When you submit your bankruptcy repayment plan, it should include the details of how you plan to repay your mortgage.

In most cases, an automatic stay is issued once Chapter 13 is filed, and creditors must stop collection efforts. There’s an important caveat to be aware of here: You must stay current on any mortgage payments that are due after the filing.

How Does Bankruptcy Affect Your Credit Score?

It’s worth noting that a bankruptcy of any kind has a major negative impact on your credit, but there are many ways to rebuild and repair the fallout. Before going through bankruptcy, consider whether it’s your only option.

The better your credit prior to filing for bankruptcy, the more negative the impact is going to be because it’s a major negative event with no prior warning signs. Experian™ says that depending on your credit history, your score could fall by up to 200 points. Depending on the type of filing, a bankruptcy stays on your credit report for 7 – 10 years.

Steps To Get A Mortgage After Bankruptcy

Whether you’re looking to buy a home after bankruptcy or refinance your current abode, there are several steps you can take to be ready when the time comes:

1. Make good use of the waiting period. There’s often going to be a waiting period before you apply. Make mindful use of this timeline to set up a series of concrete and realistic goals for yourself to prepare to submit a strong mortgage application.
2. Work to reestablish your credit. After a bankruptcy, you may have to start with credit cards or loans that are secured by your own money. Over time, showing good habits like making payments on time and maintaining little or no balance relative to your credit limits will improve your score to the point where you can apply for traditional cards or auto loans. You can work your way up to a mortgage.
3. Be able to tell your story. Not every bankruptcy is the same. There are stories of those who spent beyond their means or made bad decisions. But others may have had to get out from under high medical debt or were unexpectedly laid off. Lenders may ask for letters of explanation. Take the opportunity to talk about what happened and why things will be different moving forward.
4. Answer all inquiries promptly. Lenders are always going to go over your documentation to make sure you can afford your mortgage, but past negative events like bankruptcies are going to be subject to extra scrutiny. The lender wants to set you up for success. Make sure to answer all questions that come up as soon as possible so there are no delays.
5. Get preapproved. This will give you the top end of your budget so you know what you can afford. You don’t have to spend that much. It’s helpful to do your own budget calculations so you understand the payment you’re comfortable with. Your lender will pull your credit and ask for documentation around income and assets. Be prepared to share things like W-2s, 1099s and financial statements.

What Types Of Loans Can I Apply For After Bankruptcy?

Under the right circumstances, you can apply for an FHA loan after your bankruptcy is dismissed or discharged for a Chapter 12 or 13 bankruptcy. The waiting period is 2 years after a Chapter 7 or 11 bankruptcy. These match the guidelines for VA loans. But remember these are limited to eligible active-duty service members, reservists, National Guard personnel, veterans and qualified surviving spouses.

Conventional loans and jumbo options are eventually available again, but you should be prepared for a longer wait. With conventional loans, a Chapter 7 or 11 bankruptcy has a 4-year waiting period. With Chapters 12 or 13, you have to wait 2 years if your bankruptcy was discharged and 4 years from a dismissal. In all cases, our Jumbo Smart offerings would be an option 7 years post-bankruptcy.

Mortgage Bankruptcy Alternatives

Bankruptcy should always be considered a last resort because of the potential for loss of the assets and the severe credit impact. It’s much better to work with your lenders and creditors at the first sign of trouble to see if they can provide you with options for temporary relief while you get your feet under you. Your home loan should get particular attention because it’s likely among you biggest monthly payments.

Your servicer can evaluate you for several options for mortgage help. These may include a payment reduction or relief for a period of time. Some of the avenues a servicer may qualify you for include repayment plans, payment deferrals or loan modifications used to add past-due payments back into the loan balance.

If you’re unable to sustain a mortgage payment moving forward, your servicer may talk to you about options to gracefully exit your home. A short sale or deed in lieu of foreclosure has a negative credit impact and you’ll have to find new living arrangements, but you may find that the long-term effects these are less painful than those from declaring bankruptcy.

The Bottom Line: Getting A Mortgage After Bankruptcy Takes Patience

Bankruptcy isn’t good for your credit score. But it’s also not a permanent black mark that’s going to keep you from getting a mortgage in the future. It’s possible to get a home loan after bankruptcy is dismissed or discharged. However, there is usually a waiting period before you can apply for another mortgage.