Believe it or not, filing bankruptcy isn’t a permanent black mark on your financial history. As long as you follow the right steps, it’s even possible to buy a home.
How soon after filing bankruptcy can I buy a home?
The amount of time you need to wait to successfully apply for a mortgage depends upon the type of bankruptcy filing, and what kind of mortgage loan you want.
Chapter 7
If you have received a Chapter 7 bankruptcy discharge, you need to wait at least 4 years after your discharge date to qualify for a “conventional” home mortgage, which has the strictest requirements. However, the waiting period for conventional loans can be as short as 2 years after discharge if extenuating circumstances are present, i.e., divorce, large medical bills, or a loss of job.
Loans backed by government programs are more lenient. You have to wait 3 years for a USDA loan, and for a VA or FHA loan, you only have to wait 2 years.
Chapter 13
If you filed a Chapter 13 repayment plan, your credit score isn’t as deeply impacted as by a Chapter 7, but most mortgage loans still require a waiting period.
For conventional loans, your waiting period is two years from the discharge date, and four years from the date of dismissal. Like a Chapter 7, the waiting period for a conventional loan can be as short as 2 years after discharge simply by demonstrating an “extenuating circumstance,” or an event beyond your control, i.e., Divorce, Large Medical Bills, or Job Loss.
Government-backed loans are, like in Chapter 7, easier to get. You only have to wait 1 year for a USDA loan, regardless of whether you received a discharge or dismissal. For FHA and VA loans, you merely have to wait for the court to dismiss or discharge your case to apply.
What kind of mortgage can I qualify for?
There are no rules that say you can’t get any type of mortgage loan, but some loans are easier and faster to get than others.
FHA loans have shorter waiting periods than any other type of mortgage loan program, and looser requirements for qualification compared to other government-backed loans. An FHA loan has lower credit score requirements than a conventional mortgage, which can be helpful since a bankruptcy on your credit report will impact your score for a certain period of time. Chapter 7 bankruptcy stays on your report for 10 years, and a Chapter 13 gets reported for 7 years.
FHA loans allow credit scores as low as 580, or even 500 with a 10% down payment.
What steps do I need to take to apply for a mortgage after bankruptcy?
Repair your credit score
Unsurprisingly, a bankruptcy on your credit report can lower your credit score (or raise it, as this article shows). Mortgage lenders have minimum credit score requirements, and that’s what matters more than the bankruptcy on your record. If your score isn’t above 580, you should probably spend some time working on it before trying to buy a house.
Three things you can do to help rebuild your credit after bankruptcy:
- Re-establish credit responsibly, by getting a secured credit card. This type of credit card requires you to put down a deposit, which becomes your line of credit. If you use this for everyday expenses and pay it off each month, it can rebuild your credit score immediately.
- Pay down any remaining debt. After your bankruptcy is over, focus any extra money left over in your budget toward paying down any surviving debts. This will have the effect of raising your credit score and lowering your required monthly payments, which can make it easier to qualify for a mortgage.
- Pay your bills on time. Show that you’ve turned over a new leaf by making credit card and loan payments on time each and every month. You can make this easier by signing up for auto-pay on each account.
Write a letter of explanation for your mortgage lender.
You can improve your chances of qualifying for a mortgage after bankruptcy by including a letter of explanation with your application when you request pre-approval. This letter should contain more details about your bankruptcy, and why you needed to file.
Consider including details on the circumstances leading up to your filing (often a divorce, loss of business or job, or health crisis), and explain how your finances have improved since then. Demonstrate the steps you’ve taken to prevent future defaults, like paying down debts and establishing emergency savings. Explaining your financial situation in detail may very well help you qualify for the 2 year wait period to obtain a conventional mortgage loan. See this Fannie Mae “Borrower Eligibility Fact Sheet.”
Get a pre-approval letter.
Once you’ve followed the steps above, it’s time to apply for pre-approval by a mortgage lender. This will result in a letter from the lender telling you how much money you should be able to borrow to buy a house. A pre-approval letter will let you know your budget and signal to real estate agents and home sellers that you have access to the funds you need to buy any property on which you choose to make an offer.
Don’t get pre-approval and prequalification mixed up. Prequalification doesn’t require asset verification, so it is a lot less authoritative than a pre-approval.
Be responsive to any questions your lender may have.
Once you put together and submit your pre-approval application, your lender will review your financials to see if you qualify for a mortgage. Once you have your pre-approval letter in hand, you can start shopping for a house. As your lender reviews your credit history, they may have questions. Respond quickly and honestly.
How can I set myself up for future success before I even file bankruptcy?
An experienced bankruptcy attorney can help you look down the road toward your post-bankruptcy financial landscape. It’s free to chat with me about your options – you can call or text me at 215.551.7109, or drop me a line.
