Can You Buy a House After Bankruptcy?
Bankruptcy does not preclude anyone from buying a home, but it will take some serious work to get it done.
Buying a home after bankruptcy depends on taking the right steps during bankruptcy and waiting out the required amount of time after.
Those who have been discharged from bankruptcy are eventually able to apply and even qualify for a home loan. Make no mistake, though: It won’t be as easy as it would have been had you not filed bankruptcy.
Among the post-bankruptcy issues that will need to be addressed:
- A mandated waiting period to apply for a loan.
- Rebuilding your credit score.
- Shopping for the best mortgage loan available to fit the unique circumstances.
- Recognizing what rules apply to your filing.
The biggest difficulty will be the impact of bankruptcy on your credit score. Bankruptcy may drop a good/exceptional credit score by as much as 200 points. A fair/poor credit score will drop 130-to-150 points. Almost all bankruptcy filers wind up with a credit score below 600. That is one of the consequences of bankruptcy, though there are ways to address it. It just takes time.
How Long After Bankruptcy Can You Buy a House?
The waiting period to buy a house depends on whether you filed Chapter 7 or Chapter 13 bankruptcy, and the type of loan you seek. Waiting periods after Chapter 7 is discharged vary from two to four years. After Chapter 13 is discharged, some federal loans are available immediately, though a conventional loan requires a two-year waiting period.
The first step in qualifying for a home loan after bankruptcy is to have the bankruptcy judge discharge your case. Then comes the patience test, and the timeframe is determined by the type of bankruptcy you have and the type of loan you desire.
Chapter 7 Bankruptcy Waiting Periods
Chapter 7 is the most common type of bankruptcy. In Chapter 7 bankruptcy, the court wipes away most unsecured debts. That, in turn, has the most negative impact on your credit report.
Once the case is discharged, lenders will enforce a waiting period, otherwise known as a “seasoning period,” for those hoping to apply for a mortgage after bankruptcy. Waiting periods include:
- Four years for a conventional loan.
- Three years for a USDA loan.
- Two years for VA Home Loans or FHA mortgage.
Chapter 13 Bankruptcy Waiting Periods
Filing Chapter 13 leads to a reorganization of debt, with scheduled payments to clear those debts (including the one to your lawyer). Because Chapter 13 bankruptcy includes regular payments, it does not affect your credit score as much as Chapter 7, and the waiting period for some loans is shortened.
If the bankruptcy court dismisses the bankruptcy (rules against you), the waiting period is four years from the dismissal date. If the court discharges the case (rules for you), the time is four years from the date you filed and two years from the discharge date.
It’s important with Chapter 13 to make those payments on time and in full; not doing so will anger the court and negatively affect your home-buying ability.
Specific times for specific loans after Chapter 13 include:
- For a conventional loan, four years from dismissal date. If the court discharges the case, the time is four years from the date you filed and two years from the discharge date.
- One year for a USDA loan.
- FHA and VA loans are the most generous following Chapter 13; these lenders simply require the court to dismiss or discharge your bankruptcy before you apply. FHA also will guarantee a mortgage as soon as 12 months after you file Chapter 13, provided you are making court-ordered payments on time.
Waiting Periods for Multiple Bankruptcies
There is a price to be paid for multiple bankruptcies. If you have filed more than one time in the last seven years, the waiting period is five years before you are eligible for a home loan – though that could be reduced to three if you can prove extenuating circumstances.
What Types of Mortgage Loans Can You Get After Bankruptcy?
Technically, you can qualify for any kind of mortgage. As we have shown, some have waiting periods, and some of those waiting periods are longer than others. If you meet that waiting period and believe you qualify, you can apply for any loan.
That being said, FHA Loans may be the most advantageous option. The waiting period is shorter after Chapter 7. After Chapter 13. there is no waiting period after the court discharges or dismisses you.
FHA loans also have lower credit requirements than conventional loans. That matters because Chapter 7 bankruptcy will show on your credit report for 10 years, Chapter 13 for seven. FHA loans can be approved with a credit score as low as 580. A down payment of at least 10% may mean you can qualify with a credit score as low as 500.
To qualify for a conventional loan, your credit must be re-established, which means making timely payments on your court-ordered plan in Chapter 13, and paying bills on time after Chapter 7. Typically a conventional loan will require a minimum credit score of 620.
VA loans are provided to veterans and typically are more lenient when it comes to credit history. A USDA loan is for homes in qualifying rural areas. To qualify, the borrowers income cannot exceed 115% of the median income in the area where the home is being purchased. Generally, USDA loans require a credit score of 640, so boosting that score is important.
A non-qualified mortgage is another option. These loans fall outside the purview of federal guidelines, and as a result are risky. Features could include:
- Interest-only payments, which means building no equity in the home.
- A balloon payment, a large payment due after a set timeframe, which means setting significant money aside to be sure the payment can be made.
- A term longer than 30 years.
Non-qualifying mortgages do not have a waiting period, but carry considerable risks. They’re more a last-resort option for those looking to buy a house with bad credit.
Tips to Improve Your Chances of Getting a Mortgage after Bankruptcy
Several common-sense tips apply, starting with addressing your finances to improve your credit score before you file for bankruptcy. Getting the financial house in as much order as possible before filing means you will start a challenging process with the highest credit score possible.
Other steps follow discharge and involve rebuilding credit after bankruptcy; they fall under the umbrella heading: Get and keep your financial house in order:
- Create a budget: Arrange expense in categories. Determine required spending, and what is called discretionary spending – the dinners out, the movies, the sports events. Allocate money for savings, if you can. Break down where you are overspending, determine your budget and stick to it. Doing so will avoid the problems that got you into bankruptcy in the first place.
- Establish credit: Pay the bills on time. Avoid the traps that cost you before you filed. If you can, one of the easiest ways to improve the score is to open a new credit card, charge an amount as close to the spending limit that you know you can repay, and then repay it the next month, without carrying a balance that charges interest.
- Be careful with the credit cards: Banks may try to charge you high fees because of your past. Read the fine print. You don’t want to be caught with a $500 fee just to have a credit card. Then don’t overspend with them. The interest rate will be a significant drag on your financial status.
- Consider a car loan: This may also improve your credit. But after bankruptcy it’s best to be careful and cautious when taking on new debt. Remember, debt is what got you in trouble in the first place.
- Try to be pre-approved: When searching for a home, some mortgage lenders will pre-approve a borrower for a certain loan amount. Having that information ahead of time tells the seller you are serious and ready to make the commitment. Be aware: Getting pre-approval may be more difficult after bankruptcy.
Seek Help From a Financial Professional
Sound advice can help you weave your way through the obstacle course. A nonprofit credit counselor can sit down with you and go over budgets and ways to approach buying a home after bankruptcy. A financial professional can offer credit counseling or help in improving your credit score.
Professionals are called that for a reason. They can help. Do not be afraid to seek it.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
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