Mortgage lenders rely heavily on your three-digit credit score when you apply for a mortgage loan. And few things damage this score as much as does filing for bankruptcy protection, something that can drop your score by 100 or more points. The good news? It is possible to qualify for a mortgage loan after filing for Chapter 13 bankruptcy protection. You just have to be patient and develop positive financial habits.
Wait enough years to allow the sting of a Chapter 13 bankruptcy filing to fade. Chapter 13 filings remain on your credit report for seven years. But you don't have to wait that long to apply for a mortgage loan. The more years pass by, the more time your credit score has to recover from a Chapter 13 filing. Don't expect to qualify for a home loan the first year after filing Chapter 13. But the fourth or fifth year after a filing? You might be able to nab a loan if you've practiced sound financial habits since your bankruptcy.
Meet repayment requirements of your Chapter 13 bankruptcy agreement to make sure that you can qualify for a mortgage loan. For instance, to qualify for a mortgage loan insured by the Federal Housing Administration -- commonly referred to as an FHA loan -- or one insured by the Department of Veterans Affairs -- a VA loan -- you must first make at least 12 months of Chapter 13 plan payments. You will also need the approval of the bankruptcy court to take out an FHA loan. You must also provide your lender with a written explanation of the facts behind your bankruptcy filing to take out an FHA or VA loan. For conventional loans, you must wait two years after a Chapter 13 discharge to apply for a mortgage loan.
Practice good financial habits after filing for Chapter 13 bankruptcy protection. This means paying all your bills on time and paying off as much credit-card debt as possible. These actions will allow you to slowly, but steadily, rebuild your credit score. It might not take a full seven years for your credit score to creep back up to a level high enough to allow you to qualify for a mortgage loan if you begin a new history of paying your bills on time and handling your credit wisely.
Accept a higher interest rate if you absolutely need a mortgage loan. As your credit score improves, you might find lenders who are willing to loan you home-loan money, but only at higher interest rates. This provides financial protection for lenders who are taking a risk in lending to consumers who have bankruptcies on their records. You'll have to decide whether it makes more sense to wait a year or more to boost your credit score up to the level of 740 or so to nab the lowest interest rates from most lenders.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.