If you have filed for bankruptcy or you’re still planning to do so, you might be questioning whether it would still be possible for you to buy a house in the future. Can you still get a mortgage after filing for bankruptcy?
The good news is that it is still possible for you to buy a house even after a bankruptcy. You might even be surprised that for some types of loans and depending on what type of bankruptcy you filed, the waiting period is not that long.
In this article we will discuss the different waiting times associated with getting a mortgage after a bankruptcy. We will also provide some tips on how you can increase your chances of getting approved for a house loan if you have a bankruptcy on your credit report.
Would Bankruptcy Affect my Chances of Getting a Loan or Buying a House?
While a bankruptcy will not make it impossible for you to still buy a house in the future, you have to be aware that it will still affect your chances of getting mortgage approval. A bankruptcy is often considered a “red flag” by lenders that you have a history of not being able to repay your debts. This makes you a bad risk for them and if you are unable to raise your credit score or improve your financial standing, getting a mortgage could be difficult.
If you’re wondering: Is it wise to file for bankruptcy if I want to buy a house in the future? The answer to this will really depend on your current financial situation. While a bankruptcy can pose serious damage to your credit standing, it could relieve you of your debts.
For example, if most of your debts are unsecured debts like credit card bills, medical bills, utility bills, personal loans, etc., then filing for Chapter 7 bankruptcy can help you discharge all those debts so you can have a clean slate. This could give you more financial breathing room to afford a house in the future.
How Long Do You Have to Wait to Buy a House After Bankruptcy?
A bankruptcy stays in your credit report for 7 to 10 years. Most of the time, it is not easy to get a bankruptcy off your credit report early. However, you don’t really need to wait that long before you can apply for a mortgage. The waiting period will depend on the type of bankruptcy you filed and what type of loan you are looking to get.
How Soon After Chapter 7 Bankruptcy Can I Buy a House?
Chapter 7 bankruptcy is the most common type of bankruptcy filed by Americans. Out of over 733,000 bankruptcy petitions filed in 2019, around 62% were filed under Chapter 7. In Chapter 7 bankruptcy, the non-exempt assets are liquidated (sold off) to pay off creditors and the remaining unsecured debts are discharged or wiped away.
Many people prefer Chapter 7 because the process takes only 4 to 6 months until your debts are discharged. You can start clean, debt-free as long as you do not owe any nondischargeable debts like tax debts, student loans, and child support payments. The downside is that Chapter 7 bankruptcy can majorly hurt your credit score by 130 -150 points if you have a lower credit score, and by up to 240 points if you have a high score.
If you filed for Chapter 7 bankruptcy, the waiting period to buy a house starts from the time the judge discharges or dismisses your bankruptcy petition.
If you plan on buying a house after a Chapter 7 discharge using a conventional loan (mortgage loan not backed by the government) , the waiting period is at least four years to qualify. If you are not qualified to get a government-backed mortgage, then your only option is to wait it out.
You have to take note, however, that after four years have passed, this will not be the only requirement. In that four-year period, you would have to show that you were able to improve your financial situation and have rebuilt your credit score. Getting a conventional loan often requires higher credit scores and more stringent requirements.
Government-backed Loans (FHA, VA or USDA Loan)
A government-backed loan means that a government agency is guaranteeing your loan, making you less of a risk as a borrower. While the government is not lending you the money, it is giving the lender a certain sense of security just in case you default on the loan.
There are 3 types of government-backed mortgages: Federal Housing Administration Loan (FHA Loan), U.S Department of Agriculture Loan (USDA Loan), and the Department of Veteran Affairs Loan (VA Loan).
If you have your eye on buying a house using a government-backed loan like a VA loan or an FHA loan, then you’ll be glad to know that the waiting period after a Chapter 7 discharge is cut in half compared to a conventional loan. You will only have to wait 2 years after your bankruptcy discharge or dismissal to qualify for a VA or FHA loan. For a USDA loan, the waiting period is 3 years from dismissal or discharge of a Chapter 7 bankruptcy petition.
For people who have bankruptcy on their credit history, applying for a government-backed mortgage is often a great option. Not only is the waiting period much shorter, the requirements are also a bit more relaxed.
With an FHA loan, for example, you can buy a home even if your credit score is only 580. If you have money for a down payment of 10% or more, it is even possible for you to get a loan even with a score of 500.
How Soon After Chapter 13 Bankruptcy Can I Buy a House?
Chapter 13 bankruptcy is considered less damaging than Chapter 7 bankruptcy but a waiting period is still involved if you plan to qualify for a mortgage. When you file for Chapter 13 bankruptcy, your debts will be reorganized and you still have to pay off your debts through an installment plan approved by the court.
Just like Chapter 7, the waiting time involved to qualify for a mortgage largely depends on the type of loan you are planning to apply for.
When applying for a conventional loan, the waiting period depends whether the court discharged or dismissed your case. Buying a house after a Chapter 13 discharge with a conventional loan will require you to wait two years from the discharge date. When your Chapter 13 bankruptcy is discharged, that means you were able to complete the payment plan laid out by the court.
On the other hand, if you were unable to complete the repayments, your Chapter 13 bankruptcy case could be dismissed. This means that your bankruptcy petition was unsuccessful. If this is the case, then you would need to wait 4 years from the dismissal.
Government-backed Loans (FHA, VA or USDA Loan)
If you filed for Chapter 13 bankruptcy, it is possible to get a government-backed loan after a year. Even if you are still in the process of repaying your installment plan, you can qualify for a government-backed mortgage, as long as you have made 12 months of on-time, verified payments, have the bankruptcy trustee’s approval, and meet all the other requirements.
- For a USDA Loan, you have to wait 12 months from the date of filing Chapter 13 bankruptcy. .
- For an FHA Loan, the waiting period is at least one year after making on-time payments.
- For a VA Loan, you also have to wait 1 year from the filing date.
Tips on How to Build Your Credit After Bankruptcy if You Want to Buy a House
If you want to increase your chances of getting approved for a mortgage after a bankruptcy filing, you need to improve your credit score and overall financial situation. Remember that a bankruptcy will still serve as black mark against you when applying for a mortgage. However, if you can prove that you are already more responsible/capable in making your payments leading to your mortgage application, your chances of getting approved are higher.
1. Monitor Your Credit Report and Dispute Inaccuracies.
Request for a free copy of your credit report from annualcreditreport.com. Carefully check your entries for mistakes and dispute them through the online dispute pages of the 3 major credit bureaus: Experian, Equifax, and TransUnion. Correcting these mistakes could improve your credit score.
2. Rebuild Your Credit
After a bankruptcy, you have to show that you are turning over a new leaf. You have to gradually rebuild your credit and one way to do that is getting a secured credit card and making on-time monthly payments.
3. Don’t Take on Large Debts Before Applying for a Mortgage
If you’re planning to get a mortgage soon, avoid taking on new debts. This will lower your debt-to-income ratio (your debts relative to your monthly income), which is another important requirement when qualifying for a mortgage.
4. Get Mortgage Pre-Approval
Before you apply for a mortgage, try to get a mortgage pre-approval first. This will give you an idea how much you’re allowed to borrow or if you are qualified at all. This will also help you narrow down your options when looking for a house.
Are There Mortgage Companies That Specifically Deal With Bankruptcies?
If you’re not willing to wait 1 to 4 years after a bankruptcy, you might come across mortgage companies offering loans with no waiting periods. With some of these lenders, you can even apply for a mortgage just one day after a bankruptcy!
These companies are often referred to as non-prime lenders. Non-prime lenders specialize in lending to people who may not be eligible for a conventional loan or even a government-backed loan. They usually accept applications even if your credit score is in the 500 range, you have a high debt-to-income ratio, or you’re just coming out of a bankruptcy.
You have to be careful, however, because most non-prime lenders charge astronomical interest rates, high fees, or would require a sizable down payment. If you just survived a bankruptcy, the last thing you want to do is to get another debt you won’t be able to pay for.
Some of the popular non-prime lenders that do not have waiting periods are the following:
- First National Bank of America – Offers mortgage loans with no waiting period after a bankruptcy and is very flexible when it comes to credit and income requirements.
- Citadel Servicing – Offers no waiting period required after a bankruptcy and can loan up to $5,000,000.
- Silver Leaf Mortgage – You could be eligible for a mortgage loan one day after a bankruptcy.
- Angel Oak Mortgage Solutions – Another lender that offers mortgage loans with no waiting period.
- ACC Mortgage – You can apply for a mortgage with no waiting period after a bankruptcy. In the past, there was no minimum credit score required but their website now states a 620 minimum credit score requirement.
Buying a House is not Impossible After Bankruptcy
It is not impossible to get a mortgage loan even after you file for bankruptcy. While you might be tempted to go for non-prime lenders that offer no waiting time, you might want to consider waiting it out. Getting a mortgage is a major expense so waiting will give you adequate time to rebuild your finances and be more qualified to assume new debt.