How to buy a house after bankruptcy
How soon after bankruptcy can you buy a house?
If you had a bankruptcy discharged in the past, you might be thinking about buying a house.
The good news is that it’s possible to purchase a home following a Chapter 7 or Chapter 13 bankruptcy.
But there’s usually a waiting period of 2–4 years before you can take out a mortgage. And lenders will be looking closely at your credit score, credit reports, bankruptcy discharge details, and other factors to ensure you qualify.
Tread carefully after bankruptcy and take steps to improve your credit. With hard work and patience, you’ll eventually be able to get a home loan.
Verify your home loan eligibility. Start here (Jan 7th, 2022)
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Is buying a house after bankruptcy possible?
Yes, you can buy a house after bankruptcy. If you’re not paying cash upfront for a new home, borrowing from a mortgage lender can be challenging. But it’s not impossible.
Conventional loan programs and government–backed mortgages have processes in place to help bankruptcy filers recover from their financial missteps and become homeowners again.
Chapter 7
Chapter 7 bankruptcy is the most common type of bankruptcy. When you file for chapter 7, a bankruptcy court wipes out all of your qualifying debts.
Chapter 7 filers can expect the bankruptcy to remain on their credit report for 10 years. However, you may not need to wait an entire decade before qualifying for a home purchase. Depending on the type of mortgage, many filers only wait 2–4 years to buy a house after bankruptcy.
Chapter 13
Rather than all debt being discharged, Chapter 13 bankruptcy puts filers on a 3–5 year debt repayment plan. Afterwards, the bankruptcy court discharges any remaining eligible debts. A chapter 13 bankruptcy will remain on credit reports for seven years.
The amount of time you’ll need to wait before buying a home varies depending on how the court decides to manage your bankruptcy and whether or not it dismisses or discharges your debt.
Chapter 7 waiting periods
After a bankruptcy is discharged, it will take time to build your credit and savings back up to home–buying level. And lenders want to know your financial situation has fully recovered and that you’ll be able to manage on–time payments with a new mortgage.
As such, mortgage lenders enforce a minimum waiting period or “seasoning period” before borrowers can apply for a mortgage after bankruptcy.
The minimum waiting periods to get a mortgage after Chapter 7 are as follows:
- FHA loans: two years
- VA loans: two years
- USDA loans: three years
- Conventional loans (Fannie Mae or Freddie Mac): four years
Understand that these waiting periods are the minimums required by each loan program. Some lenders will require you to wait longer.
For example, some lenders will ask you to wait three years before applying for an FHA loan rather than the two–year minimum required by the Federal Housing Administration.
There are some rare situations where borrowers can get approved before the two–year waiting period, which we describe below. But for most prospective home buyers, these minimums will be strictly enforced.
Take the time to get your credit score as high as possible and save for a bigger down payment. Both strategies will help you get a lower mortgage rate and a more affordable home loan when you do buy.
Verify your home buying eligibility. Start here (Jan 7th, 2022)
When do bankruptcy waiting periods start?
Understand that the waiting periods after Chapter 7 bankruptcy don’t start until a bankruptcy court discharges or dismisses your bankruptcy.
That’s at the end of the bankruptcy proceedings – typically 4–6 months after you first file.
If you’re counting down the days until you can buy a house after bankruptcy, be sure to start your calendar on the correct date – of the discharge or dismissal – because it will make a big difference in when you hit the two–year mark.
Can I buy a house 1 year after Chapter 7 discharge?
In most cases, there’s at least a two–year waiting period from your Chapter 7 discharge date until you can be approved for a home loan.
“There are some limited circumstances in which you can obtain a loan after one year from the discharge,” explains Andrea Puricelli, production resources engagement manager for Inlanta Mortgage.
“But that’s only if the bankruptcy was caused by extenuating circumstances beyond your control, and you’ve since exhibited an ability to manage your financial affairs responsibly.”
Such extenuating circumstances could apply if you were forced into bankruptcy due to medical bills from a serious illness or major job loss or income reduction.
Keep in mind that each loan program has its own guidelines for what life events qualify as an extenuating circumstance. So it’s important to speak with your bankruptcy attorney to ensure that you have a clear picture of whether or not your financial situation is eligible.
But in most cases, it takes more than a year to recover after declaring bankruptcy. So most home buyers will have to wait two years or more before buying real estate anyway.
FHA loans after Chapter 7 bankruptcy
Fortunately, you can qualify for an FHA loan following Chapter 7. But be prepared to wait a while before you’ll get approved.
“Bankruptcy will not stop you from making a large purchase, like a home, in the future. So yes, it is possible to obtain an FHA home loan after Chapter 7 bankruptcy,” says Jeremiah Heck, a debt and bankruptcy attorney.
“Typically, you have to wait for a minimum of two years after your bankruptcy is approved by the courts to be eligible.”
But in some cases, the mortgage lender may require additional time.
“For instance, some banks tend to ask potential borrowers who filed Chapter 7 bankruptcy to wait a total of three years before they are eligible,” adds Heck.
In addition to the waiting period, you’ll need to meet other FHA loan requirements. These typically include:
- Credit score requirement of at least 580
- Down payment of 3.5% or more
- Debt–to–income ratio below 50%
- Steady income and employment
- Income source expected to continue for three years
Avoiding any new debts after bankruptcy – for example, a car loan or personal loan – can help your chances of qualifying for an FHA mortgage once the two–year waiting period is over.
Requirements for other types of mortgage loans
An FHA loan isn’t the only loan type that can get you on the fast track to homeownership.
The Department of Veterans Affairs requires a minimum waiting period of two years for VA loans (from the date of your Chapter 7 discharge).
To qualify for a VA home loan, you need to be an eligible veteran, service member, or member of an associated group (including some spouses).
“For a USDA loan, the waiting period is three years, with some exceptions based on the bankruptcy filing,” Heck notes.
Keep in mind, these types of loans require a higher minimum credit score than FHA loans.
To qualify for a conventional mortgage or VA loan, you’ll typically need a credit score of at least 620. And USDA mortgages require a 640 FICO score or higher to buy homes in eligible rural areas.
FHA’s lower credit requirements – starting at 580 – make this type of mortgage more attainable for home buyers with a Chapter 7 bankruptcy in their credit history.
Is it hard to buy a house after bankruptcy?
“Getting a loan will be very difficult for a few years immediately following a bankruptcy,” says Reggie Graham, branch manager for Silverton Mortgage.
He notes that home buyers applying after bankruptcy can often expect bigger down payment requirements and higher interest rates.
“Your focus should be on rebuilding your credit to prepare for applying for a mortgage loan when you’re ready,” says Graham.
Keep in mind that a bankruptcy filing stays on your credit reports for 7–10 years. And even after you become mortgage–eligible, your lender may still require legal documentation from the bankruptcy court to verify your status when you apply.
“This doesn’t hinder your ability to buy a home. But it’s realistic to acknowledge that a lender is going to consider that fact when reviewing your loan request,” cautions Heck. “My suggestion is to expect 2–3 years to rebuild your financial health following a bankruptcy.”
Graham also suggests the wait time to buy a home may be shorter if you file a Chapter 13 bankruptcy instead.
“Chapter 13 involves paying back an agreed–upon portion of your debt, which lenders look more kindly upon,” he explains.
How to improve your chances of buying a house after bankruptcy
To get approved for a mortgage after bankruptcy, you need to demonstrate to lenders that you can manage your finances responsibly and that you will be able to reliably make mortgage payments.
“That will require establishing good credit habits and ensuring that you’re not over–utilizing credit,” says Puricelli.
To rebuild your credit more quickly, follow these tips provided by Graham:
- Pay all your bills on time and in full
- Check your credit score and three free credit reports often and dispute anything inaccurate
- Don’t take on unsecured debt, like personal loans or credit cards, which will most likely come with high interest rates
- Get a secure line of credit, such as a secured credit card, that is backed with a deposit you pay beforehand
Having a friend or relative co–sign on new credit lines can also help you qualify more easily and start building new credit.
But this strategy comes with a lot of risk, because the co–signer is agreeing to take over your new debts if you can’t pay them. And if the loan goes bad, their credit will take a hit, too.
Buying a house after Chapter 7 bankruptcy FAQ
Most home buyers have to wait at least 2–4 years after Chapter 7 discharge before they can get approved for a home loan. It may be possible to qualify sooner if you were forced into bankruptcy for reasons beyond your control, but early approval is rare.
The average credit score after a Chapter 7 bankruptcy is commonly in the low 400s to mid 500s, according to attorney Jeremiah Heck. To qualify for a home loan, you typically need a credit score of 580–620 or higher.
Yes, having a co–signer can improve your chances of getting a mortgage post–bankruptcy. “But remember that this can be a risky move for the co–signer. So you want to be sure you can make the monthly payments on time if you choose this option,” recommends Graham. Also, you will still likely need to wait two to four years after a bankruptcy to apply for a mortgage loan, even with a co–signer.
Usually not. The minimum waiting period to obtain a VA loan after Chapter 7 bankruptcy is two years.
Yes, provided you rebuild your credit and wait two years after your bankruptcy is approved by the courts. Avoiding new debt after your bankruptcy is discharged can also help your chances of qualifying for an FHA mortgage.
Once your credit score is above 580, you stand a better chance of qualifying for an FHA loan. “However, many lenders could require a higher score. If your credit score falls below 580, you may still qualify for an FHA loan, although with a higher down payment requirement,” says Silverton Mortgage branch manager Reggie Graham.
If your credit score is 580 or higher, you may only need a down payment of 3.5 percent. “But if you pursue an FHA loan and your score is lower, the down payment required will usually need to be at least 10 percent,” notes Heck.
With Chapter 7 bankruptcy filing, judges often don’t discharge second mortgages. That means the filer is still responsible for repayment and lenders can begin foreclosure proceedings to recoup losses. Chapter 13 bankruptcy filings offer “lien stripping,” which removes junior liens on the property. Since primary mortgages take priority, debt from your second mortgage may possibly be discharged – after completion of a repayment plan – removing the second mortgage lien. If approved, lien stripping could be beneficial for homes that are underwater.
Once your waiting period has concluded, you’ll likely need to repair your credit by paying down debts and making on–time payments for bills. You’ll then need to write a letter of explanation that provides your lender with more details about your bankruptcy. Afterwards, you’ll seek mortgage preapproval just like you would with a new home loan or a refinance.
Check your post–bankruptcy home buying eligibility
Today’s mortgage rates are still near historic lows.
Typically, home buyers applying after Chapter 7 bankruptcy will be charged higher interest rates. But shopping around in today’s low–rate market could help you net a fair deal on your home loan.
If you’re thinking about buying a home, check with a few mortgage lenders to verify your home loan eligibility and find out what rates you qualify for.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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