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Buying a House After Bankruptcy: When and How Can You Do It?

tl;dr

What You Need To Know

  • With patience and work, it’s possible to get a home mortgage loan after bankruptcy
  • There’s a shorter waiting period for government-backed loans than there is for conventional mortgage loans
  • Working on improving your credit before you apply for a mortgage can increase your chances of getting your loan approved as well as getting better interest rates

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If you’ve gone through bankruptcy and aspire to own a home, you are likely wondering if you’ll be able to get your finances back on track and fulfill your homeownership dreams.

In this regard, you’re not alone. In 2020, more than 500,000 people filed for Chapter 7 and Chapter 13 bankruptcy.[1] So, while bankruptcy can be difficult, it’s still possible to reestablish your credit. With time, patience and good planning, you can make your dream of owning a home your reality. 

How Long Do You Have To Wait After a Bankruptcy Filing?

In the case of folks like us, bankruptcy is designed to help people settle debts and move on with their lives. While bankruptcy offers many of us a “fresh financial start,” it negatively impacts credit scores and can stay on our credit reports for up to 10 years.[2]

But you don’t have to wait the entire 10 years before you can apply for a mortgage.

How long it takes to qualify for a mortgage after bankruptcy usually depends on two key factors: the type of bankruptcy you filed for and the type of mortgage loan you want.

Types of personal bankruptcy

There are two common types of personal bankruptcy plans:

  • Chapter 7 (liquidation bankruptcy): With this plan, you don’t have to pay back your creditors. Instead, a bankruptcy trustee liquidates (think: sells) your assets – which may include a car, a boat, retirement accounts and any other personal property of value – to pay off your debts. 

Chapter 7 bankruptcies tend to work best for lower-income individuals with fewer assets. After 90 – 100 days, your bankruptcy is discharged. That means that your creditors have to stop trying to collect on any outstanding debt.

  • Chapter 13 (reorganization): You don’t have to sell your property with a Chapter 13 bankruptcy. Instead, you work with the bankruptcy court and negotiate a repayment plan. You’ll make monthly payments to a bankruptcy trustee for 3 – 5 years (your repayment plan term) to settle your outstanding debts. 

Once you’ve completed your payments, your bankruptcy is discharged. If you fail to meet the requirements of your repayment plan, your bankruptcy may be dismissed and your creditors can continue to try to collect from you.

Types of mortgage loans

Besides the type of bankruptcy you apply for, how long you’ll have to wait before you can apply for a mortgage loan will also depend on whether you want to apply for a conventional loan or a government-backed loan. 

  • Conventional mortgage loans: Wait times are longer with conventional loans. Because lenders want to minimize their risk, they’re going to be more cautious before they offer you a loan.
  • Government-backed mortgage loans: There is a shorter waiting period for Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA) loans because the lender knows the federal government will cover the loan in case the borrower can’t repay the mortgage.  

So, how long will you have to wait? This helpful table breaks it down by bankruptcy and loan type.

Chapter 7 BankruptcyChapter 13 Bankruptcy
Conventional Loan[3]4 years after discharge4 years after dismissal or 2 – 4 years after discharge
FHA[4]1 – 2 years after discharge1 year of pay-out period with written approval to get a mortgage or 2 years after discharge 
VA Loan[5]2 years after discharge1 year after filing
USDA Loan[6]3 years after discharge1 year after discharge or dismissal


What Can You Do While You Wait?

You should get busy! Work on getting your credit and finances in good shape before you apply for a mortgage. Otherwise, your loan application could be denied or you’ll end up paying higher interest rates.

Get comfortable with your credit

Take some time to get reacquainted with your credit score. Go through your bank and credit card statements every month to get a better understanding of where your money is going.

You can also request a free annual credit report from one of the big three credit bureaus (​Equifax®, Experian™ or TransUnion®), or use a free credit reporting service to track the progress of your credit score. 

Be on the lookout for errors or unfamiliar charges; it may be a sign of fraud or misuse.

Make your payments on time

One of the best ways to rebuild your credit is to make your payments on time and in full. Even a single late payment can hurt your credit score. If you can, consider setting up autopay, so your bills are always paid on time each month.

If you have a budget but you’re still having a hard time making your monthly payments, don’t be afraid to ask for help. Talk to a credit counselor or your bankruptcy attorney to see if they can help you adjust your repayment schedule or find other ways to stabilize your finances.

Use a secured credit card

A secured credit card works the same way a “regular” unsecured credit card does. You use it to buy stuff and you make payments on it each month.

The key difference between the two types of cards is that you have to put down a refundable security deposit to open a secured credit card account. The deposit usually sets your credit limit. If you miss a payment, the credit card company can use your deposit to pay off your balance.

As you use the card and make your payments, you’re rebuilding your credit history and demonstrating to lenders and credit agencies that you can manage your debts. 

When you’re ready to move on from your secured credit card, you can convert it to an unsecured credit card or get your deposit back. 

Are There Special Considerations When Applying After Bankruptcy?

When you apply for a mortgage after bankruptcy, there are a few extra steps you’ll have to take to reassure your lender that you can repay the loan.

Find the right mortgage lender

Be upfront with your lender or mortgage broker, and ask them how they work with borrowers in your situation. If you did have issues with your spending or debt, let them know what you’ve done to improve your money management.

If your regular lender can’t help you, there are always other options. Some lenders specialize in working with borrowers who have been through bankruptcy.

One good place to start is the FHA’s list of approved lenders. Since FHA-approved lenders offer both conventional loans and FHA loans, they have experience working with borrowers who have less-than-perfect credit and may be able to provide you with a range of mortgage options.

Be thorough

Make sure that you provide a detailed, organized picture of your financial situation. Leave no detail behind. Your lender will want to know as much about your financial history as possible. 

Before you apply, organize your documents, including:

  • Employment history
  • Tax returns
  • Paystubs (or profit and loss statements if you’re self-employed)
  • Bank statements
  • Credit card statements
  • Student loan or auto loan statements

The more information you can provide when you apply for a mortgage, the better.

Write a letter of explanation

When you submit your mortgage application, include a letter of explanation. It’s not required, but it’s an opportunity to explain your unique financial circumstance and make the case that you’re a good credit risk.  

The letter should include:

  • The reason(s) you filed for bankruptcy
  • The status of your bankruptcy
  • How your financial situation has changed since you filed for bankruptcy
  • If your income has improved 
  • The steps you’ve taken to improve your situation, including setting up an emergency fund, paying bills on time and budgeting

Get preapproved

Before you start house hunting, get preapproved for a mortgage. 

Getting preapproved for a mortgage is a good way to test the waters with lenders. It will also help give you a sense of what kinds of mortgage terms you qualify for. 

When getting preapproved, remember to ask about both conventional and government-backed home loans to see which one makes the most sense for your situation.

Be responsive

If a lender agrees to work with you, be as responsive as possible when it comes to answering their questions or submitting paperwork. Do your best to make sure they have all the information they need to process your application.

Getting a Home After Bankruptcy

Bankruptcy may feel like the end of the world – but it isn’t. 

It’s a legal process that helps you wipe out or repay your debt, and hopefully, puts you in a stronger financial position in the future.

If you’re willing to put in the time to reconstruct your credit history and improve your money management skills, bankruptcy doesn’t have to be a barrier to homeownership.

  1. United States Courts. “Annual Bankruptcy Filings Fall 29.7 Percent.” Retrieved September 2021 from https://www.uscourts.gov/news/2021/01/28/annual-bankruptcy-filings-fall-297-percent

  2. TransUnion®. “How Long Does Bankruptcy Stay On Your Credit Report?” Retrieved September 2021 from https://www.transunion.com/blog/credit-advice/how-long-does-bankruptcy-stay-on-credit-report

  3. Fannie Mae. “B3-5.3-07, Significant Derogatory Credit Events — Waiting Periods and Re-establishing Credit.” Retrieved September 2021 from https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-5-Credit-Assessment/Section-B3-5-3-Traditional-Credit-History/1032994681/B3-5-3-07-Significant-Derogatory-Credit-Events-Waiting-Periods-and-Re-establishing-Credit-08-07-2019.htm

  4. U.S. Department of Housing and Urban Development. “Section C. Borrower Credit Analysis Overview.” Retrieved September 2021 from https://www.hud.gov/sites/documents/4155-1_4_SECC.PDF

  5. U.S. Department of Veterans Affairs. “VA busts four home loan myths that hurt Veteran homebuyers.” Retrieved September 2021 from https://blogs.va.gov/VAntage/19931/va-busts-four-home-loan-myths-that-hurt-veteran-homebuyers/

  6. U.S. Department of Agriculture.”Chapter 10: Credit Analysis.” Retrieved September 2021 from https://www.rd.usda.gov/files/3555-1chapter10.pdf

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In Case You Missed It

Take-aways

  1. There’s a difference in the type of bankruptcy you have – between chapter 7 and chapter 13
  2. A secured credit card can help you rebuild your credit
  3. When working with lenders, be honest about your bankruptcy, and include a letter of explanation with your mortgage application

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