Can you get a HELOC after a bankruptcy?

A home equity line of credit (HELOC) lets you tap into your home equity when you need cash. Perfect credit isn't typically a requirement to qualify and it's even possible to get a HELOC after bankruptcy. Approval may depend on the type of bankruptcy, how long it's been since discharge, your credit recovery, how much equity you have, and your financial situation. Many lenders require a waiting period and proof of financial stability before approving a new home equity line of credit.

If you've filed Chapter 7 or Chapter 13 and are now looking at your home as a potential source of financing, it helps to know what options you have. Bankruptcy doesn't permanently close the door to borrowing against your home. Let's look at what it takes to get a HELOC after bankruptcy.

Does bankruptcy prevent you from getting a HELOC?

Bankruptcy does not prevent you from getting a HELOC. It could make getting approved more challenging at least initially. Lenders typically want to see that your bankruptcy is discharged or dismissed, your credit has stabilized, you can afford the payment and you have enough equity.

How does a HELOC work? A home equity line of credit is a credit line that's secured  by your home. You can access your line of credit during an initial draw period, and pay it back with interest in a separate repayment period. Your home acts as a safety net for the lender. If you default, the lender could foreclose on the home. 

In terms of what affects your ability to get a HELOC after bankruptcy, lenders look at whether you've made on-time payments since discharge and whether your income is stable. The amount of equity you have in your home also makes a difference. Equity is the difference between what your home is worth and what you owe on the mortgage. 

These same factors also come into play if you want to apply for a home equity loan after bankruptcy. A home equity loan gives you a lump sum of cash to use as you wish. It's also secured by your home but the key differences between a home equity loan and a HELOC lie in the rates, borrowing flexibility, and repayment terms. 

Getting a HELOC after Chapter 7 bankruptcy

Chapter 7 bankruptcy lets you walk away from certain debts in exchange for giving up some of the things you own (your assets). Most lenders require that your Chapter 7 bankruptcy is fully discharged before they'll consider a HELOC application. Discharge means that a bankruptcy court has released you from the debts you included in your initial filing and those creditors can no longer try to collect what you owed them. 

Lenders may require a waiting period before you can apply for a HELOC after bankruptcy.  A waiting period can be an opportunity for you to focus on improving your credit and finances. You could help your credit post-bankruptcy by:

• Paying bills on time

• Applying for a secured credit card or a small credit-builder loan

• Asking someone you know and trust to add you to one of their credit cards as an authorized user

Aside from credit score improvements, you might also consider making some low-cost improvements to your home that could help raise its value. Having more equity could help reduce risk to the lender when getting a HELOC after bankruptcy and potentially make it easier to get approved.

Liens are an issue that may be easy to overlook. A lien is a legal claim to your property that's associated with a debt. Liens aren’t inherently bad. For instance, your mortgage lender has a lien on your home until you pay off your mortgage. Usually, you can’t sell or refinance a property until the debt is satisfied and the lien removed. 

If your home has existing liens or if the bankruptcy affected the title in any way, you'll need to resolve those issues before applying for a HELOC. For example, your home’s title could be under the control of the bankruptcy court while your case is active. 

The more time that passes after bankruptcy the more borrowing options you might have. A homeowner 18 months post-discharge may find limited options, as most lenders prefer longer waiting periods. On the other hand, someone who's several years out of bankruptcy and has rebuilt their credit may find that multiple lenders are willing to consider their application.

Getting a HELOC after Chapter 13 bankruptcy

Chapter 13 bankruptcy lets you repay debts over a period of three to five years, following a plan that's approved by the court. You don't have to give up any assets; you just have to make all the required payments to get a bankruptcy discharge. 

Why does that matter if you're thinking about a HELOC? If you're still in your Chapter 13 repayment plan, you may need bankruptcy trustee approval before taking on any new debt. A trustee is someone who's appointed by the court to oversee your repayment plan once it's approved. Some lenders won't consider applications until after your Chapter 13 plan is completed and discharged, and a waiting period has passed.

What lenders look at when considering a HELOC after bankruptcy

Lenders weigh several factors when you apply for a home equity line of credit after bankruptcy. Those factors include the amount of equity you have in your home, your combined loan-to-value (CLTV) ratio, income, debt, and credit. The amount you want to borrow can also factor into a lender's decision-making.

• Equity and combined loan-to-value: Lenders want to see that you have sufficient equity in your home. One way that's measured is your combined loan to value (CLTV) ratio. CLTV is the total of the debt you owe on a home, divided by its appraised value. Debt includes your primary mortgage and any second mortgages you have or want, like a HELOC. A typical maximum CLTV for a HELOC is 80% to 85% of the home's appraised value.

• Payment history since bankruptcy: Your payment history after discharge matters as it tells lenders how you've handled your financial obligations since the bankruptcy. Lenders want to see consistent on-time payments on any credit accounts, rent, utilities, or other bills you pay.

• Income stability: Steady employment and reliable income show lenders you can manage monthly payments for a HELOC, on top of what you're paying for your first mortgage. Job changes since your bankruptcy may raise concerns, while consistent income, or income that increases over time, can strengthen your application.

• Qualification guidelines: Lenders will examine your application to make sure your debt-to-income (DTI) ratio is under their limit and your current credit score meets their minimum requirement. Debt-to-income ratio measures how much of your gross pay goes to debt repayment each month. A typical DTI limit for a HELOC is 43%, though some lenders may allow up to 50% for borrowers with strong income or higher amounts of equity.

How long after bankruptcy can you apply for a HELOC?

The amount of time you'll have to wait to get a HELOC after bankruptcy varies by lender and by the type of bankruptcy you filed. A waiting period of two to four years is not unusual. Some lenders may approve you in a shorter window, while others may require a longer wait. 

• Chapter 7 waiting periods: For Chapter 7 bankruptcy, many lenders require a waiting period of four years after discharge. Some lenders may consider applications after two years if factors beyond your control contributed to your bankruptcy. 

• Chapter 13 bankruptcy waiting periods: For Chapter 13 bankruptcy, a typical waiting period may be one to two years instead. Some lenders may even consider applications while you're still in your repayment plan if you have trustee approval.  

Does it matter if your bankruptcy case was discharged or dismissed? It can. Dismissal means that your case was terminated without any discharge or debt forgiveness. If your bankruptcy is dismissed instead of discharged, waiting periods could still apply before you can get a HELOC. Lenders may also ask for details about why the case was dismissed. 

Steps that could improve your chances of approval

Getting approved for a HELOC after bankruptcy is a sign that you've done the work to get your finances back on track. Pat yourself on the back for that, you deserve it! Since we've already mentioned some things you can do to improve your credit scores, consider other ways you could increase your approval odds. 

• Maintain stable income: Stay in your current job if possible, and document any income increases that demonstrate financial improvement. Lenders view stable employment as a strong indicator of your ability to repay.

• Increase income, if possible: Making more money could help improve your DTI, which might make you look more favorable to lenders. Taking on a part-time job, starting a side hustle, negotiating a pay raise, or asking for more hours at work are just some of the ways you could boost your income.

• Monitor credit reports for errors: Check your credit reports regularly for inaccuracies related to your bankruptcy. Dispute any errors promptly, as even small mistakes could affect your credit score. If an error is found, the creditor is required to remove or correct it. 

• Shop for the right lender: Some lenders may be more understanding than others when it comes to bankruptcy. As you compare lenders, consider minimum credit score and income requirements, DTI requirements, and the amount of equity you'll need to have. Getting rate quotes that don't affect your credit can help you make those comparisons.

• Consider a smaller HELOC: You might have a lot of equity in your home but that doesn't mean you need to borrow all of it. Applying for a smaller line of credit could reduce risk in the lender's eyes and help you get approved. Later, you could ask the lender if they'd be open to a HELOC limit increase. They may be willing to agree if your equity has increased, your credit scores have improved, and your income is steady.