It's possible to take out a new mortgage after a bankruptcy, but it's often difficult. Bankruptcy can cut credit score by 200 points or more. You may have to wait a couple of years after bankruptcy before you can get a good interest rate. Most lenders will also want to know why you filed bankruptcy and if you're likely to do it again.
After a bankruptcy, one thing lenders often want to see is a hardship letter, where you explain the circumstances that drove you into bankruptcy. If you can show that you suffered a one-time disaster or personal tragedy -- death of the family breadwinner, heavy medical bills or a divorce -- that makes you look like a much better candidate. If you suffered multiple accumulating problems that stacked up until they dragged you down, list all of them.
Presenting the Facts
Just writing in the letter that you were seriously ill and unable to work won't cut it. Whatever explanation you offer, you need to back it up. If you had a medical emergency, include copies of the hospital bills with your letter. If you filed bankruptcy because your spouse died, include a copy of the death certificate. Like everything else you claim in your mortgage paperwork -- income, debts, assets -- you have to provide documentation.
You can add more information about your bankruptcy to improve your shot at a mortgage. If you went through Chapter 13 bankruptcy, make that known to the lender. In Chapter 13, you pay back creditors over several years before getting a debt discharge so you usually end up paying more than if they're discharged in Chapter 7. If you paid back the vast majority of your debts, say 90 percent, that's a big plus for lenders.
Even if you show that your bankruptcy was due to a freak event that will never happen again, you still have to meet all the other lender requirements. To close the deal you need restored credit, a steady income and enough cash for the down payment. It may take a couple of years of using credit again before your score looks good enough for a decent interest rate. The stronger your application looks, the more likely the lender will be OK with the bankruptcy.
- New York Times: Life After Bankruptcy
- Realtor.com: Buying a Home After Bankruptcy
- Inman News: Get a Mortgage After Foreclosure, Bankruptcy
- U.S. Courts. "Federal Court Finder." Accessed May 18, 2020.
- U.S. Courts. "Chapter 7 Means Test Calculation." Accessed May 18, 2020.
- U.S. Dept. of Justice. "LIST OF APPROVED PROVIDERS OF PERSONAL FINANCIAL MANAGEMENT INSTRUCTIONAL COURSES (DEBTOR EDUCATION) PURSUANT TO 11 U.S.C. § 111." Accessed May 18, 2020.
A Durham, NC resident, Fraser has written about law, starting a business, balancing your budget and fighting evictions, among other legal and financial topics.