How to Qualify for a Mortgage After Chapter 7 Bankruptcy

When you file for chapter 7 bankruptcy, otherwise known as liquidation, a creditor seizes all but certain exempt assets and forgives most of your debt in return. Bankruptcy is a legal acknowledgement that you were unable to meet your financial obligations. Thus, your credit rating takes a big hit — usually a 100 points or more. A bankruptcy also remains on your credit report for 10 years.

Bankruptcy affects your ability to qualify for a home mortgage in the following ways:

• You need to wait four years before a lender will qualify you for a conventional mortgage loan with market rates.
• Two years is the waiting period for Federal Housing Administration (FHA) loans.

It is possible to get a mortgage loan from a hard money lender as soon as six months after bankruptcy, but these loans require a down payment of at least 30 percent, and the interest rates are high.

While you are waiting, there are some steps you can take to improve your chances of receiving favorable loan terms once you do qualify for a mortgage.

Check for Discrepancies in Your Credit Report

As soon as the bankruptcy has been discharged, you need to get organized. Order a credit report from each of the major agencies — Equifax, Experian and TransUnion — and look over the information carefully. You can dispute any errors online on the agency’s website, and this process lets you know where you stand. Awareness is an essential first step in financial responsibility.

Repair Your Credit 

You then need to focus on repairing the hit to your credit. An important thing to keep in mind is that, while the bankruptcy itself remains on your report for a long period of time, most negative information goes away after three years. Thus, your goal should be to make the bankruptcy look like a solitary event rather than part of a general disqualifying pattern.

Here are some ways to repair your credit:

• Limit the amount of credit applications you make even if you qualify. Each time you apply for credit, the lender runs a check, and that itself lowers your score.
• Use a secured credit card that reports directly to the credit bureaus, and always pay your bill on time.
• Use installment loans with retailers to demonstrate that you are capable of making regular payments.

Cover Your Bases

While important, your credit score is not the only thing lenders look at. After a bankruptcy, you want to project stability.  Paying above the monthly minimum on installment debts and sticking to the same job throughout the waiting period both reassure lenders.

Finally, keep in mind that the more money have to put on a down payment for the new mortgage, the better your negotiating position will be. Saving money is one of the most important ways you can qualify for competitive mortgage terms after a bankruptcy.