Yes, you can buy a house after bankruptcy. 452,990 bankruptcies were filed in 2023, but people also bought around 4.8 million homes. This shows that filing for bankruptcy is not the end-all of your homeownership dreams.
Buying a home after bankruptcy might seem complex at first, but Houzeo got you covered. Browse through our collection of homes for sale near you to find one suited to your needs and budget. Begin your homebuying journey today!
Can I Buy a House After Bankruptcy?
Yes, purchasing a house after bankruptcy is certainly possible. Bankruptcy allows you to start afresh. It helps you to get rid of medical bills, personal loans, and credit card debts, among others. However, home buying becomes complex as you need good credit scores of more than 750.
Your cumulative financial report shows late payments, judgments, and collections on your outstanding debts. The more such instances there are, the higher your chances of having low credit scores.
The good news is that appropriate actions can help mitigate the negative effects of poor credit and bankruptcy, and reduce the waiting period for a loan from 10 to 2 years. Thus, you can rebuild your credit score by restoring a solid credit history.
What Are the Types of Bankruptcy?
Bankruptcy is legal action taken against people who fail to pay outstanding debts. There are two most prominent types of bankruptcy that people file: Chapter 7 and Chapter 13. This makes it important to know the type of bankruptcy, mortgage, and lender you qualify for in the process.
Chapter 7 allows you to remove unsecured debt, such as unpaid credit card bills. In short, it clears all debt. Conversely, Chapter 13 allows you to restructure your debt to prevent adverse events like property foreclosure. Essentially, it reorganizes debt based on a payment schedule.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is also known as liquidation bankruptcy. It deals with the assets you own at the time of filing bankruptcy. If your financial wealth crosses a specified limit, assets beyond the exempted amount should be sold.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as payment plan bankruptcy, gives debtors 3-5 years to pay back creditors. After that, the bankruptcy court discharges the leftover debts.
Under this, your credit report displays bankruptcy for 7 years. Nonetheless, you can take up the mortgage or any other type of loan for that duration and seek the bankruptcy court’s permission.
How Can You Buy a House After You File for Bankruptcy?
Your credit report reflects your creditworthiness. Bankruptcy filings may remain on your credit report for 7-10 years, depending on what chapter you file it under. However, it doesn’t mean that you should wait to get a mortgage because of it.
Make sure that you monitor your credit report after every four months. Keep your eyes on debt paid or discharged in bankruptcy for better understanding.
You must restore your credit history by paying off any outstanding obligations. After bankruptcy, the waiting periods for government-backed loans (such FHA, VA, or USDA loans) are shorter – between 1 to 4 years. Conventional loans are still available, but they can take up to 10 years.
Give a letter of explanation of your bankruptcy and the changes you’ve made subsequently. It boosts your chances of approval. It ensures that you’re in a position to take up the financial responsibility of a mortgage.
How Long After Filing Bankruptcy Can You Buy a House?
Banks can reduce both Chapter 7 and Chapter 13 bankruptcy waiting periods under extenuating situations. Some common examples of such circumstances are:
- In case of loss of income because of divorce.
- In the event of loss of income due to job loss.
- Banks reduce waiting periods by 2-3 years when you have to pay large medical bills.
These claims require proper documentation and proof of how the respective circumstance led to the bankruptcy.
Buying a House After Chapter 7 Bankruptcy
You can buy a house after Chapter 7 Bankruptcy in 2-4 years. However, it depends upon the type of mortgage you adopt. The following is the waiting period from the date of discharge for the type of mortgage:
- FHA loans: These loans have a 2-year waiting period.
- VA loans: VA loans necessitate waiting for 2-years before applying.
- USDA loans: You can apply for USDA loans after a 3-year waiting period.
- Conventional loans: For traditional loans, you must wait and complete a 4-year waiting period.
Purchasing a house after Chapter 7 bankruptcy is feasible but requires strategic financial management. The waiting periods for different mortgages vary, necessitating careful planning and patience.
A Chapter 7 bankruptcy remains on your credit report for 10 years, and significantly impacts your credit score. During the waiting period, rebuild your credit by paying bills on time, maintain low credit card balances, and avoid new debt.
Buying a House After Chapter 13 Bankruptcy
You can buy a house right after or two years after Chapter 13 bankruptcy. However, it depends on the type of mortgage you take out. The following is the waiting period from the date of discharge for the type of mortgage:
- FHA loans: There is no waiting period time under the Chapter 13 bankruptcy to apply for FHA loans.
- VA loans: Like FHA loans, there is no waiting period for VA loans either.
- USDA loans: Homeowners must wait for 1-year to apply for USDA loans filed after Chapter 13 bankruptcy.
- Conventional loans: You can apply for conventional loans only after a 4-year waiting period.
Filing for bankruptcy under Chapter 13 doesn’t affect your credit status as severely as Chapter 7. However, it stays on your credit report for seven years.
Chapter 13 bankruptcy is a good option for people who have a constant source of income. It allows you to take more control over your finances than Chapter 7, which compels you to sell most of your assets.
How Does Bankruptcy Affect Your Credit Score?
Your credit score is greatly impacted when you file for bankruptcy. It is because it tells lenders that you haven’t been able to make your loan repayments on time. Lenders will record your bankruptcy on your credit report in the public records section.
A bankruptcy filing on your credit record can have a significant impact on future credit decisions made by lenders. This is especially true when you apply for a mortgage to purchase a property.
In other words, filing for bankruptcy might hamper your ability to obtain credit. It may also prevent you from making some financial decisions, such as buying a home after bankruptcy.
Tips for Buying a House After Bankruptcy
Here are the tips on how to qualify for a mortgage even after filing for bankruptcy:
Rebuild Your Credit
These mortgage loans act as your source of credit. So, you should get yourself a secured credit card or loan to make payments on your account and clear your debt every month.
Focus on having extra cash after paying off debts. This will have a positive impact on your creditors and increase your credit score. You can also focus on taking on lower debt to become eligible for a post-bankruptcy mortgage.
Save for a Down Payment
Once you have rebuilt your credit score and completed the waiting period, ensure you have saved an adequate down payment. While the down payment depends on your loan, you can buy a home after bankruptcy with FHA loans at just 3.5% mortgage interest rate.
USDA and VA loans do not require a minimum down payment. However, you should save for a 20% or more down payment to get a traditional loan without private mortgage insurance.
Work With a Mortgage Lender
Buying a home after bankruptcy is possible but requires a lengthy documentation process. While you are going through the mortgage application process, ensure that you seek advice from mortgage lenders.
They will help you to manage the entire process and become mortgage-approved easily. Houzeo gives you access to 140+ lenders across the U.S. You can begin looking for a lender right here.
Mortgage Application Process
- Craft a Bankruptcy Explanation: State your reason for bankruptcy to address the red flags in your loan application. Provide the concrete reasons for your bankruptcy and how you are improving your financial stature.
- Secure Pre-Approval: After approving the mortgage, the lender sends you a pre-approval letter. This is to ensure that you are eligible for the loan and have a well-established budget for the property.
- Address Lender Enquiries: Lenders review loan applications to understand your income, assets, credits, and debts. They decide if you are eligible for getting a mortgage after bankruptcy. Ensure that you stay honest and respond quickly to get easy approval.
Consider an FHA Loan
The easier credit qualifications of FHA home loans after bankruptcy make it a helpful option as compared to a conventional mortgage. You must:
- Have a minimum 580 credit score.
- Make at least 5% down payment.
- Show the ability to pay mortgage insurance.
Under Chapter 13 bankruptcy, you can apply for an FHA loan just after the loan dismissal. Ensure you have paid the court and received written permission from it.
Under Chapter 7 bankruptcy, you can apply for an FHA loan after 2 years of declaration. During this waiting period, you can build a good credit score and ensure you take only a few new loans.
Find Homes for Sale Under Your Specific Budget
Bottom Line
Now you know that it’s certainly possible to buy a house after bankruptcy. The next step is to get sound advice from professionals to buy your dream house, while structuring your finances.
Focus on improving your credit score and seek financial counseling. You can then ease your home buying process by applying for a mortgage after you meet the designated waiting period requirements.
Houzeo provides the best housing options, curated according to your needs. Our dedicated customer support also ensures that your homebuying experience remains hassle-free. So, don’t wait. Start looking for your dream home NOW!
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Frequently Asked Questions
Can I refinance my mortgage loan after bankruptcy?
Yes, you can refinance your mortgage loan after bankruptcy, but only when you seek permission from the bankruptcy court before the loan agreement.
How long will it take to repair credit after bankruptcy?
It ideally takes 18-24 months to repair credit after bankruptcy if you pay all your bills promptly and open a secure credit card.
How soon can I purchase a home after bankruptcy?
There are different waiting periods for different kinds of loans. While Chapter 7 includes a 4-year waiting period, Chapter 13 includes a period as low as 12 months for FHA loans. However, the waiting period can vary for different loans, which includes other loan details.
