How to Get a Mortgage After Bankruptcy and Foreclosure

Losing your home to foreclosure or being forced to declare bankruptcy can take a toll on both your well-being and your wallet. If you’ve filed for bankruptcy or been through foreclosure at some point, all is not lost. If you take the right steps, it can be possible to obtain a mortgage and buy a new home.

Step 1: Review Your Credit Reports

Chapter 13 bankruptcies and foreclosures can remain on your credit report for at least seven years; Chapter 7 bankruptcies can linger on credit reports for up to 10 years. Unfortunately, you can’t do anything to remove those negative marks sooner. But it’s important to monitor your credit reports during this time.

First, review your credit reports from each of the three major credit bureaus. Check to see that all of the accounts that were included in your bankruptcy filing are being reported properly. If you went through foreclosure, make sure that’s being reported properly as well.

Next, look for any errors or inaccuracies. Even a small error could cost you points from your credit score. If you spot an error, you have the right to initiate a dispute with the credit bureau that’s reporting the information. Equifax, Experian, and TransUnion allow you to initiate disputes online.

If the credit bureau determines that an error or inaccuracy exists, they’re required to either correct it or remove it from your report. Either one could help to raise your score, which could improve your chances of getting a mortgage later.

Step 2: Rebuild Your Credit

Both bankruptcy and foreclosure can do significant damage to your credit score, although their effect will recede over time. In addition to correcting any errors that you find on your credit reports, you can take some positive steps to increase your score.

Some of the best ways to improve your credit scores over time include:

• Paying bills on time, or early if possible, every month
• Applying for a secured credit card and making on-time payments
• Maintaining a low credit utilization ratio on any credit cards that you might be using after bankruptcy or foreclosure
• Applying for a secured or unsecured credit builder loan to establish a positive payment history

It’s very important to avoid late payments after bankruptcy or foreclosure, as they can be damaging to what may be an already-low score. Also, use discretion when applying for new credit cards or loans, as each new inquiry can deduct points from your score.

Step 3: Establish Consistent Income

Maintaining a steady income following a bankruptcy or foreclosure is important for several reasons.

First, it’s an opportunity to build some savings. You can establish an emergency fund and work on setting aside some money toward a down payment once you’re ready to try buying a home again.

Next, having a steady income can make you appear less risky in the eyes of lenders once you do apply for a mortgage. Generally, lenders prefer to see homebuyers with lengthy employment histories and consistent income each month.

Also, keep in mind that special rules may apply if you’re self-employed or run a business. In that scenario, lenders may want to see at least two years’ worth of income history vs. one. So it’s also important to maintain good records of your income. That can include W-2s, 1099s, and copies of pay stubs.

Step 4: Be Patient and Research Loan Options

If it has been less than two years since your debts were discharged through bankruptcy, then you will need to wait to apply for a mortgage. If you lost your previous home to foreclosure, then you may have to wait longer—typically at least three years.

You can use this time to work on building your credit up while also researching the requirements for different mortgage loans. The kinds of loans that you may able to get following a bankruptcy or foreclosure can include:

• Conventional loans
• Federal Housing Administration (FHA) loans
• U.S. Department of Agriculture (USDA) loans
• U.S. Department of Veterans Affairs (VA) loans

Each type of loan has different requirements regarding credit scores, income, assets, and debt. Of these options, an FHA loan may be best suited for someone coming out of bankruptcy or foreclosure. It’s possible to get an FHA loan with a down payment as low as 3.5% and a credit score of 580. You could even purchase a home using an FHA loan with a credit score as low as 500 if you’re able to put 10% down.

Step 5: Prepare to Apply 

Once you’ve established good credit again and gone through the necessary waiting period, what’s next? First, you’ll want to make sure that you have an adequate down payment saved up. The amount you need can depend on the loan. Again, with FHA loans, you can purchase a property with as little as 3.5% down. USDA and VA loans have no down payment requirements. But you’ll generally need 20% or more down to get a conventional loan without paying private mortgage insurance (PMI).

Organizing certain documents can help you get mortgage-ready. Some of the things that a lender may ask for include:

• W-2s
• 1099s
• Tax returns
• Pay stubs
• Bank statements
• Retirement or investment account statements

Keep in mind that if your credit score is still low because of a bankruptcy or a foreclosure, you’ll likely pay a higher interest rate on your loan than you would otherwise. That, in turn, will affect how much you can afford to pay for a home. If you’ve had problems in the past, you probably don’t want to stretch yourself too thin with significant mortgage payments, anyway.

Using a mortgage calculator is an excellent resource to budget these costs.

The lender may want a co-signer, so keep that in mind. Check with relatives or friends who may be willing to co-sign the loan for you. Bear in mind that they will be responsible if you can’t make the payments—which could destroy your relationship with them—so do this only as a last resort.

The Bottom Line

Many people hit financial rock bottom at some point in their lives and end up with bankruptcy or foreclosure on their record. If that has happened to you, it doesn’t mean that you have to give up your dream of owning another home. You may only have to postpone the dream for a bit. Meanwhile, you can use that time to shore up your credit and save for a down payment.