For those who have declared bankruptcy, it may feel as though you're on financial probation for up to 10 years, since that's how long a bankruptcy can stay on your credit report. However, mortgage borrowers could be eligible to apply for a home loan in as little as one year following a bankruptcy. "If you filed Chapter 7 bankruptcy, which means you discharged all your debt, you are eligible to apply for a mortgage in two years for an FHA or VA loan and in four years for a conventional loan," says Julie Flatland, vice president of credit in the mortgage lending division of Carrington Mortgage Services in Santa Ana, Calif. "If you filed for Chapter 13 bankruptcy, you can be eligible in one year for an FHA or VA loan and in two years for conventional financing," she says. "While those post-bankruptcy rules are the industry standard, sometimes a lender will make an exception and approve an FHA or VA loan earlier if there were extenuating circumstances such as unemployment by the primary wage-earner." Lenders for both conventional and government-insured mortgage loans will scrutinize your credit report to make sure you are paying bills on time and haven't taken on too much new debt. "Consumers seeking a mortgage loan after filing for a Chapter 7 or 13 bankruptcy should ensure all bills are current and payments are made on time, as this will help to reestablish strong new credit," said Susan Fitzpatrick, director of communications at GMAC Mortgage in Fort Washington, Pa., in an email. "Additionally, borrowers should keep all supporting documents related to their bankruptcy and have documentation on hand to support any extenuating circumstances of their bankruptcy."
Bankruptcy and your credit
A bankruptcy will lower your credit score initially, but how much depends on your credit score and history prior to the bankruptcy. The farther you pull away from bankruptcy, the less of an impact it has on your credit score, says Gail Cunningham, vice president of membership and public relations for the National Foundation of Credit Counseling in Washington, D.C. Borrowers of FHA and VA loans can be approved with credit scores as low as 620 or 640, depending on the lender. Since conventional loan interest rates depend on your credit score, borrowers with a score of 740 or higher generally qualify for the lowest mortgage rates.
4 post-bankruptcy strategies
Cunningham recommends the following four tips to rebuild your credit so you're ready to apply when the waiting period is over: