How to get a mortgage after bankruptcy
If you’ve had to make the tough decision to declare yourself bankrupt you might be wondering about how to get a mortgage after bankruptcy.
Being bankrupt doesn’t quite carry the stigma it used to. But it is a serious situation and you will have to take steps to rebuild after being declared bankrupt.
Latest government statistics show that individual insolvencies (which includes bankruptcies, debt relief orders and individual voluntary arrangements) were 10% higher in March 2024 than March 2023. One person in every 648 had to enter individual insolvency, the figures show.
Bankruptcy is a legal tool that helps those who can’t pay their debts. It is used to stop creditors taking court action in some cases.
It’s a last resort for most who are having financially difficulties. But it isn’t always the right answer as it costs almost £700 to apply for bankruptcy. If you’re thinking about bankruptcy, you can get advice from Citizens Advice Bureau. They can help you decide whether it’s right for you.
Here, we’ll look further into what it means to declare yourself bankrupt and how to get a mortgage after bankruptcy.
What does it mean to be bankrupt?
Becoming bankrupt is an individual insolvency that is a legal status for anyone unable to repay debts. Only those with debts of more than £5,000 can be declared bankrupt. People unable to pay lower debts can choose an individual voluntary arrangement (IVA) or debt relief order (DRO).
Once you are declared bankrupt, the value of your possessions are split up and shared to those you are indebted to. It includes your home, car and other possessions other than your essentials.
You will be asked to pay your bankruptcy debt for up to three years, depending on income. Becoming bankrupt means you don’t have to deal with creditors. Most lenders also stop most types of court action. Usually, you are discharged – which means free from debt – after 12 months.
At no point during those 12 months are you able to apply for any credit, as lenders deem it too risky. You may only apply for credit – including a mortgage, credit cards, loans, etc – one day after the 12 months are over.
That said, some mortgage lenders will not offer a loan to anyone declared bankrupt until 3 years after the discharge date. That means 4 years after the initial bankruptcy declaration. Others do not offer mortgages until 6 years after the discharge date.
How to get a mortgage after bankruptcy
Many people assume that once you have been declared bankrupt you will never be able to apply for a mortgage. That’s untrue! But beware, you are likely to be very limited by the lenders happy to offer a mortgage. It isn’t impossible, however!
Many lenders who offer mortgages after bankruptcy are specialists and used to dealing with people in your situation. It’s always best to speak to a mortgage broker rather than trying to visit high street lenders. That’s because they have the experience to prepare your application.
But be prepared to be asked for a much larger deposit. One lender insists on a 30% deposit for people who apply one day after being discharged from bankruptcy.
There are things you can do to improve your chances of a mortgage after bankruptcy. This includes getting a good credit score while you rebuild your situation.
When can I apply?
As we have already mentioned, you cannot apply for a mortgage during the bankruptcy, which is usually 12 months. Some people might be discharged earlier – but it all depends on the court’s decision.
Once discharged, you may find it more difficult to apply for a mortgage. This often takes some years and in that time working on your credit score is advisable. The point at which you become eligible to apply for a mortgage after being bankrupt depends on the lender.
Some lenders might be happy to offer you a mortgage as soon as you are discharged. But there will be very strict criteria including a bigger deposit and higher fees and interest rates.
You will find it easier to get a mortgage the longer you have been discharged. Also, lenders are more likely to offer better interest rates and higher loan to value ratios. After about four years, many lenders will view you as no different to those without bankruptcy in their past.
Some lenders, however, will never offer a mortgage at any time for those who have been declared bankrupt, even if it was decades ago. These include Santander, Virgin Money, Clydesdale Bank and Bank of Ireland.
What should I do next?
If your bankruptcy has been discharged, you need to work on your credit score. Make sure you pay bills on time, avoid payday loans and take out a small form of credit. If it’s a credit card, ensure you clear it quickly. All this helps show to lenders you are not as big a risk.
Once you are ready to apply for a mortgage, then speak to a broker. They have the knowledge and experience to improve your chances. You can speak to our experience team by clicking here or call 0191 5118550.
