Conventional Loan After Bankruptcy: How Long You Have To Wait
Few events impact a credit report more than bankruptcy. After moving a case through the courts, it can take years to rebuild your financial profile. However, prospective borrowers with a bankruptcy on their record may still qualify for a conventional loan, assuming they meet the required waiting period and other credit guidelines.
Understanding the Difference Between Discharge and Dismissal
Before diving into the waiting periods for getting a conventional loan after bankruptcy, it's essential to understand the difference between bankruptcies that have been discharged and dismissed. They may sound similar, but the two outcomes are drastically different and can sometimes affect the waiting period.
Discharge occurs when the court agrees to release the petitioner of their debt obligations. This wiping of the slate transpires after meeting eligibility standards, providing the proper paperwork, and, in some cases, satisfying their repayment plan terms. Discharge is the ideal outcome for nearly everyone filing bankruptcy.
Dismissal occurs when a bankruptcy case has been denied by the courts (or, occasionally, voluntarily dismissed by the petitioner). With this outcome, debts remain the debtor's obligation, and creditors can restart collection attempts.
Bankruptcies are often dismissed when paperwork is filed incorrectly, or the bankrupt party fails to meet the terms of their repayment agreement.
Chapter 7 Bankruptcy Waiting Period
Chapter 7 is the most common type of bankruptcy in the United States. It requires the liquidation of assets to repay creditors. Once eligible assets are sold, the remaining debts are discharged. In the majority of cases, individuals filing for Chapter 7 bankruptcy have modest incomes and very few assets that aren't protected by law from liquidation.
When it comes to the waiting period after a Chapter 7 bankruptcy, conventional loan guidelines require lenders to wait at least four years from the date of discharge or dismissal to originate a mortgage.
Chapter 11 Bankruptcy Waiting Period
It's unusual for individuals to file for Chapter 11 bankruptcy. But there are certain situations where it would make sense for someone with a high level of debt, lack of a consistent income, or other unique circumstances. Chapter 11 is viewed as the most complex and costly type of individual bankruptcy and involves the repaying of certain debts over an extended period.
Like Chapter 7, lenders require borrowers to wait four years to obtain a conventional loan following a Chapter 11 bankruptcy.
Chapter 13 Bankruptcy Waiting Period
The second most common type of bankruptcy, Chapter 13, is typically used by people with assets not protected when filing under Chapter 7.
Similar to Chapter 11, debtors must establish a repayment plan for a portion of what they owe. The remaining debt is discharged after the successful completion of the court-mandated terms. But despite this similarity, Chapter 13 bankruptcy is much simpler and cheaper than Chapter 11.
Lenders differentiate between Chapter 13 bankruptcies which have been discharged and dismissed. Borrowers with a discharged Chapter 13 bankruptcy only need to wait two years to qualify for a conventional loan. Those with their bankruptcy dismissed must still wait four years.
Getting a Conventional Loan With Multiple Bankruptcies
Federal law does not restrict the number of times someone can file for bankruptcy, although there are requirements on how long they must wait between filings. Sometimes, a borrower may have multiple bankruptcies within the past seven years.
In this situation, conventional lenders require a waiting period of five years from the discharge or dismissal of the most recent bankruptcy.
Note: Two co-borrowers who each have one bankruptcy on their credit report can apply for a conventional loan together without facing multiple bankruptcy restrictions.
Extenuating Circumstances May Shorten the Wait
Sometimes, bankruptcies result from extenuating circumstances outside of the borrower's control. Lenders recognize that, in some cases, these nonrecurring events leave the bankrupt party with no option apart from default. With documented hardships, conventional lenders may approve borrowers after a shorter waiting period.
The most commonly accepted types of extenuating circumstances include:
Divorce or death of a spouse
Loss of employment not due to termination for cause
Substantial medical debt
(Note that FHA lenders do not count divorce, job loss, or the inability to sell a home as extenuating circumstances.)
Bankruptcies that were the result of extenuating circumstances need to have documentation to support the claims, as well as a written letter of explanation from the borrower.
When approved, extenuating circumstances reduce the conventional loan waiting period to two years for all chapters of bankruptcies. The waiting period for individuals with multiple bankruptcies is also lowered to three years.
Chart of Bankruptcy Waiting Periods for Conventional Loans
Here’s a quick reference chart with each type of bankruptcy and the waiting period that borrowers face when applying for a conventional mortgage:
Standard Waiting Period
Discharge: Two Years
Dismissal: Four Years
*waiting period begins from the date of the most recent bankruptcy
When Does the Waiting Period Start?
The waiting period “clock” starts ticking on the discharge or dismissal date, not when the bankruptcy is filed or any other date relating to the proceedings.
Re-Establishing Credit After Bankruptcy
In addition to waiting the set amount of time after bankruptcy, lenders also require borrowers to have re-established credit. This means meeting standard eligibility requirements, including having a minimum credit score of 620.
Borrowers with no recently reported credit history or who have too few accounts to generate a credit score cannot get a conventional loan following bankruptcy.
Alternatives to Getting a Conventional Loan After Bankruptcy
Prospective homebuyers who aren't able to get a conventional loan after bankruptcy because of the waiting period still have options. Several conventional loan alternatives may offer approval sooner.
FHA lending guidelines allow borrowers with Chapter 7 bankruptcies to qualify for a loan after two years. Extenuating circumstances can shorten the wait to just 12 months. Borrowers with a Chapter 13 bankruptcy are eligible after 12 months of successfully meeting the terms of their repayment plan.
VA loans also allow someone to qualify two years after a Chapter 7 bankruptcy on their credit report. This waiting period is just 12 months with extenuating circumstances. With Chapter 13 bankruptcy, borrowers are eligible after completing one year of scheduled repayments.
Borrowers can qualify for a USDA loan three years after a discharged Chapter 7 bankruptcy. Like other government-backed loan types, USDA borrowers are eligible for a mortgage after 12 months of repayment with a Chapter 13 bankruptcy.
Mortgages that don't adhere to conventional or government-backed mortgage guidelines are called non-QM loans. Not bound by set standards, non-QM lenders can offer loans immediately after bankruptcy. However, they'll likely require a considerable down payment and higher interest rates.
Applying for a Conventional Loan after Bankruptcy
If you’ve faced bankruptcy in recent history, you may still be able to get a conventional loan. And even if you don’t meet conventional waiting requirements, there are plenty of other loan options that you might be eligible for sooner. Contact a mortgage professional to determine what types of loans you are able to qualify for with your past bankruptcy.
Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, My Mortgage Insider, and more.