You recently filed for bankruptcy, and you want to buy a home – it will take some time, sure. Meanwhile, you can keep yourself informed and ready for a new, financially stable life of car loans and new credit cards.
You’ll have to face hardships for a few years to grow your savings, but at the end of the tunnel is a light that guides you towards finally buying a house. Also, bankruptcy attorneys and real estate agents got your back.
What are the most popular types of bankruptcy?
Before you worry about home buying, it’s important to be informed about your specific bankruptcy classification.
Chapter 7: The more serious debt resolution
A Chapter 7 bankruptcy case is when the court relieves you from all your existing debt (student loans, child support, alimony, court fees not included, though).
Chapter 7 is the most prevalent bankruptcy filing since it’s the most straightforward and attractive solution. It comes with a downside – your credit will fall miserably, stay on your credit report for up to a decade, liquidation will occur, and most importantly, it will be almost impossible to get a mortgage.
It will take four years after a Chapter 7 bankruptcy before you can “recover” or become dismissed by the court. Then, you can go back to normalcy and finally get a conventional loan.
However, there’s some good news for government-backed mortgage loans: you’ll only wait three years before you can apply for a United States Department of Agriculture (USDA) loan.
Lastly, taking a Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loan equates to a shorter waiting time of two years after dismissal.
Chapter 13: Keeps off foreclosure
Chapter 13 is more lenient since it doesn’t impact your credit score as bad as Chapter 7 does. For Chapter 13, you’re setting a plan to repay your debts within a three to five-year installment.
If you have enough regular income, you’re qualified for Chapter 13 bankruptcy. As long as you have under $394,725 in unsecured debt and $1,184,200 in secured debts, you can file for Chapter 13.
This filing grants you a suspension from current foreclosures and other debt payments and postpones while waiting for the court to approve a plan, but it won’t get rid of the debt. If all goes well, the said plan will let you proceed with regular payments to stay in your house.
It’s not the quickest method like Chapter 7 is, but it’s better than liquidation.
How long after bankruptcy can you buy a house and apply for a mortgage?
Can you buy a house after bankruptcy? Not immediately, that’s for sure.
Lenders will put your financials under observation for quite a while before applying for a mortgage loan. That’s why it’s extremely important to work on rebuilding your credit (more on this later) as soon as you get discharged.
If you’re careful, you’ll qualify for a new mortgage in a couple of years. Understand that your bankruptcy filing is a “stain” on your record and can only go away with time and effort to improve your financial responsibility. That’s the best you can do to prove to lenders that you pay your bills on time and keep debt to a minimum.
Below is a handy guide for how long you have to wait to get different mortgage loans.
| LOAN TYPE | CHAPTER 7 WAITING PERIOD | CHAPTER 13 WAITING PERIOD |
| Conventional mortgage loan | 4 years | 2 years |
| FHA and VA mortgage loan | 2 years | 1 year |
| USDA mortgage loan | 3 years | 1 year |
What Mortgage Can You Get After Bankruptcy?
Frankly, most lenders won’t be too keen on giving you low-interest rates upon seeing your credit record history. That’s just how it is; you can’t control someone’s first impressions of you.
An FHA mortgage is your best bet if you want to purchase a home.
1. FHA Loans
It provides the most favorable interest rate that lets you obtain a fairly affordable home. Although FHA requires additional mortgage insurance fees for eleven years (at least), it gets you a relatively low downpayment (can be as low as 3.5%), low closing costs, and easy credit qualifying.
With FHA, the federal government pays the lender of the mortgage. However, this loan can’t consider anyone who incurred a Chapter 7 discharge within the last couple of years, as opposed to someone with a Chapter 13 where you don’t need to wait for the discharge for FHA’s approval, provided you pay all your bills on time to the trustee within a year.
There’s another condition for the FHA, aside from the lender’s consent: the bankruptcy court needs to approve of the debt that comes with home-buying. These courts will only do that once they compare your rent payments to your monthly mortgage and conclude that you’re in good financial standing.
2. VA Loans
Servicemembers, military veterans, and surviving spouses can avail of VA loans. As for the waiting period, the same goes for the FHA: you get bankruptcy waiting periods of two years and one year for Chapter 7 discharge and Chapter 13 filing, respectively.
VA loans are helpful for said eligible people in getting, building, repairing, or keeping a house either directly through VA itself or courtesy of a private lender (VA-backed home loan). Like FHA, it’s their key to more reasonable terms.
3. USDA
USDA’s Rural Development Program is responsible for this type of loan. USDA prioritizes lower-income, rural area residents.
As mentioned in the table above, three years after Chapter 7 discharge and one year after Chapter 13 discharge are the waiting times – except for extenuating circumstances such as job loss, government benefit reduction, and serious illness. For said cases, the waiting period is reduced to one year both for Chapter 7 and Chapter 13, provided that you’ve made payments on time for the latter.
Said extenuating circumstance needs to have happened within 12 months of the bankruptcy filing, and it should be the cause of your bankruptcy.
4. Conventional loan
Conventional loans aren’t part of a government program. These cost less than FHA loans but are harder to get.
The two conventional loans are conforming and non-conforming. The former can have either a government-set loan limit or a company-set limit, while the latter is more flexible.
Some large conforming loan companies, namely Fannie Mae and Freddie Mac, can guarantee most US mortgages. The two of them are government-sponsored enterprises (GSEs) that make loans more affordable and a 30-year fixed-rate loan possible. They both need private mortgage insurance that will serve as protection from default with conventional loans.
| Chapter 7 waiting period | Chapter 13 waiting period | Minimum credit scores | |
| Fannie Mae | Regular: 4 years after discharge Extenuating circumstances: 2 years after discharge | 2 years after discharge or 4 years after dismissal (2 years in case of extenuating circumstances) | Regular: 620 Adjustable: 640 |
| Freddie Mac | Regular: 4 years after discharge Extenuating circumstances: 2 years after discharge | 2 years after discharge or 4 years after dismissal (2 years in case of extenuating circumstances) | Regular: 620 For certain circumstances: 640 |
Do note that Fannie Mae and Freddie Mac aren’t the only options for banks. Some banks have their own set of terms, but this is so much work to go through.
Consider seller-financed or rent-to-own homes
Recently foreclosed homes are a great opportunity for a cheaper-priced property, since the sellers, who hold the title until it’s fully paid, are desperate to make a sale to new homeowners. Because of that, no one has to do a credit check, and zero percent higher interest is added in their selling process – they’ll hand the property over to you. The seller-financed home is the best and quickest option you have of homeownership after bankruptcy.
On the other hand, rent-to-own agreements will cost you a couple of hundred dollars more per month but allow you to live in exactly the house you want for 3-5 years. The reason for such a drastic increase in monthly dues is the agreement that you’ll officially buy the house after renting it temporarily. A percentage of the total monthly payment will be considered as a downpayment for ownership of the house.
The advantage of rent-to-own contracts is the level of control you have in choosing a dream home, and the security that it will be officially yours after a few years. The disadvantage is the possibility of you eventually backing out of the deal with the real estate agent, which means that the extra monthly fees you paid beforehand were all for nothing.
To avoid the cons, you have to work a lot on rebuilding your credit, which we’ll discuss below.
How can you apply for a mortgage after a bankruptcy and rebuild your credit?
In buying a home after a financial disaster, it’s only reasonable to make significant changes to your lifestyle that lead to credit repair.
1. Reset personal finances, aim towards good credit after you file for bankruptcy
Let your experience with bankruptcy serve as a motivation to rebuild your life. It’s okay to take it slowly. What’s important is you aren’t stuck in a rut or make the same mistakes you did with regards to debt management.
Focus on paying your remaining credit card debt, and opening secured credit cards and installment loans. The credit card will let you pay your monthly debt after bankruptcy.
Each month, exert all your energy towards paying your bills on time. For extreme measures, you might want to consider an auto-pay.
Sacrifices will have to be made during these trying times, but your future self will thank you.
2. A detailed explanation letter goes a long way
Nobody wants to deal with bankruptcy, and your lender is no exception. To soften the blow of your lender’s initial disheartenment upon seeing your credit history, you might want to send them a detailed explanation as to why you declared bankruptcy, your unfortunate circumstances, and the steps you’re taking to recover from bad credit fully.
It’s fairly easy to write an explanation letter since all you need to do is address the cause of the bankruptcy and the fact that you’re working on a solution to your problem. Examples of some valuable information are recovery from a past illness (high medical bills) or an abandoned business. These facts, coupled with the proof of your financial stability, will help beat the stigma surrounding a bankruptcy history.
It is by no means required, but the letter adds warmth and sincerity to the otherwise cold atmosphere surrounding the world of finance.
Conclusion on How to Buy a House After Bankruptcy
You’ve to wait a while before you can buy a home after bankruptcy, and it all depends on your circumstances and loan type, but to summarize:
For Chapter 7, you’ll wait two years to four years to recover. Chapter 13 bankruptcy encompasses a less definite timeline. You can apply immediately or after four years. In that period, you have to put all your effort into raising your credit score. It would be best to prepare a letter of explanation for your lender when they check your credit report. To support your message, you need to have a good, steady credit record improvement to back it up.
Ultimately, you should keep your head up and not let your income (or your lack thereof) define your self-worth. What’s important is you keep moving forward and strive for a good future, since bankruptcy doesn’t mean you have to give up.
