Buying a house after bankruptcy may seem like an impossible feat, but it’s actually not out of the question. Even if you have a Chapter 7 or Chapter 13 bankruptcy on your credit report, you can still buy a home after a certain period of time.
The exact length depends on several factors, including the type of bankruptcy and the type of home loan you’d like to get. Mortgage lenders weigh your credit score heavily when evaluating your mortgage loan application. So, you’ll also need to re-establish your credit score after it’s been lowered by filing bankruptcy.
But you don’t need to be overwhelmed by this process. With a little patience and the right knowledge, you’ll get back into a home you can call your own, even with a bankruptcy in your past.
What types of home loan can you get after bankruptcy?
The process for buying a home after Chapter 7 bankruptcy, or even Chapter 13 bankruptcy, depends on what type of mortgage loan you apply for. Each one has a different “seasoning” period, which determines how long you have to wait until you qualify again.
Of course, you also have to meet the mortgage lender’s other basic mortgage requirements, so it’s important to know those as well.
Here are three of the most common mortgage products available today and how each one treats buyers with a bankruptcy in their past.
FHA loans are backed by the Federal Housing Administration (FHA), part of the Department of Housing and Urban Development (HUD). They offer homebuyers who have less than perfect credit history the chance to purchase a home.
So, how long after filing bankruptcy can you get an FHA mortgage? The waiting period to qualify depends on what type of bankruptcy you filed.
For a Chapter 7 bankruptcy, you must wait a period of at least two years from the date the action was discharged (not filed). Some lenders might require a longer period, but two years is the legal minimum.
The waiting period for FHA loans after a Chapter 13 bankruptcy is a bit more complicated.
You’re technically allowed to apply for an FHA loan while still paying on this type of bankruptcy, as long as your payments are verified and have been consistently paid for at least a year.
You’ll also need a bankruptcy court trustee’s written approval and a written explanation of the bankruptcy included in your mortgage loan application.
FHA Loan Requirements
In addition to meeting the seasoning period for your type of bankruptcy, you must also meet the basic requirements of an FHA mortgage.
You can purchase a home with as little as a 3.5% down payment if your credit score is 580 or higher. However, if your credit score is 579 or lower, you must pay 10% of the home’s purchase price as your down payment.
You have to pay a mortgage insurance premium if you have less than 20% equity in the home, which is rolled into your monthly payments. The annual premium you pay ranges from 0.45% to 0.85% of the loan amount and depends on the amount of equity and your mortgage term length.
VA loans are offered to active members of the military and veterans. They include several benefits, including no down payment and competitive interest rates.
Luckily, you can still apply for a VA loan even after filing bankruptcy. The waiting period is the same as an FHA loan: a minimum of two years from the discharge date.
Keep in mind that you still have to qualify for all the other aspects of the loan. Most lenders require a minimum credit score of 620 and a debt-to-income ratio of no more than 41%. You’ll also need to obtain a Certificate of Eligibility that proves your military status.
There is no mortgage insurance attached to a VA loan. However, most borrowers have to pay a funding fee based on your down payment amount and the number of times you’ve used a VA loan.
Not all lenders finance VA loans, so make sure you work with one who has specific experience in this niche since there are some rigorous guidelines involved.
USDA loans come from the United States Department of Agriculture. You can get a USDA loan for homes in qualifying rural areas. USDA loans generally require a minimum credit score of 640, and you can get a USDA loan one year after bankruptcy.
Conventional loans have some of the strictest underwriting standards, and they become even more stringent when there’s a bankruptcy involved. The waiting period is four years from the discharge date of a Chapter 7 bankruptcy.
For a Chapter 13, it’s two years after the bankruptcy discharge date, unless it was dismissed without a discharge, in which case you’ll have to wait a full four years.
You’ll need to use that time to work on rebuilding your credit. You should be saving up your cash to qualify for a conventional loan because most lenders require a 640 credit score and a large down payment.
You might qualify with a lower credit score if you can put down a larger amount of money. It’s always best to compare eligibility requirements, and interest rate offers from several lenders.
How does bankruptcy affect your credit score?
Even if you’ve waited the appropriate seasoning period to apply for a home loan, you still need to repair your credit to qualify. Whether you’re applying for an FHA loan, a VA loan, or a conventional loan, you’ll most likely need your credit score to be somewhere between 580 and 640.
On the plus side, a Chapter 7 bankruptcy filing automatically wipes out your debt, so your “amounts owed” category can rebound pretty quickly. This also helps your debt to income ratio when it comes time to apply for a loan.
But a bankruptcy can cause your credit score to drop as much as 240 points, and it takes time to bring it back up. How long? A Chapter 7 bankruptcy stays on your credit report for up to ten years. A Chapter 13 bankruptcy remains on your credit report for up to seven years.
Begin Repairing Your Credit as Soon as Possible
There are a few things you can do right away to begin repairing your credit score. The first is to pay all of your bills on time each month so that you can rebuild your payment history.
You should also keep your oldest credit accounts active, even if you don’t use them. The length of your credit history accounts for 15% of your credit score, so this is a simple way to refrain from losing any more points.
Buying a house after bankruptcy is by no means unattainable. It just takes patience and diligence to rebuild your credit scores while waiting out the seasoning period.
Can you buy a house even after a foreclosure?
Purchasing a home after a foreclosure is a bit trickier than a bankruptcy because you’ve shown poor ability to repay the exact product you’re hoping to purchase again.
But nothing is impossible; you’ll just have to wait a bit longer than you would with a straightforward bankruptcy. Here’s how it works.
For conventional loans, you can expect a seven-year wait period from the actual date the foreclosure was filed (it stays on your credit report for the same amount of time). However, FHA loans only require a three-year wait period.
However, if you can prove that the foreclosure was caused by a situation out of your control, you might be able to shorten the seasoning period for both types of loan.
Examples of this include a substantial period of unemployment, a major illness, or a divorce. To shorten a conventional loan wait time from ten years to three years. You’ll also need at least a 10% down payment or 90% loan to value ratio.
What if you had both a bankruptcy and a foreclosure?
You can still get a mortgage even after having both a bankruptcy and a foreclosure; you just need to clarify at which point each seasoning period begins.
This can be a little tricky since some factors in both cases overlap with one another. Really, different lenders can view things in different ways, but generally speaking, the seasoning date should begin when you are no longer responsible for the debt.
So if your foreclosure was discharged with a Chapter 7 bankruptcy, your seasoning period would last for two years following the discharge of the bankruptcy, not from the date of the foreclosure.
It’s always best to review your personal credit report with your mortgage lender to ensure you’re interpreting it correctly.
Going through bankruptcy or foreclosure might seem like a huge bump in the road, but it’s not insurmountable. You still have the opportunity to purchase your own home after just a bit of waiting and working.
Review your personal situation to determine which type of mortgage would be best for you and how long you have to wait before applying for one. Then take careful steps to repair your credit to ensure your application is approved and you get the best interest rates available.
If you feel more comfortable getting professional help in rebuilding your credit, contact our partner Lexington Law. They may be able to help you remove negative items like a bankruptcy or foreclosure on your credit report.
Let Lexington Law deal with creditors and credit bureaus for you to help you get one step closer to being in a house you can call your own.