If you're thinking of filing for bankruptcy or have already done so, you might be wondering if you can buy a house or get a mortgage after bankruptcy. In short, yes. You can always redeem yourself if you are willing to work hard for the appropriate amount of time. Here is everything you need to know about getting a mortgage after declaring bankruptcy.
Table of Contents
Can You Buy a House After Bankruptcy?
How Long After Bankruptcy Can You Buy a House?
Chapter 13 vs Chapter 7 Bankruptcy
Buying a House After a Chapter 7 Discharge
Buying a House After a Chapter 13 Discharge
How to Get a Mortgage After Bankruptcy
Buying a House After Bankruptcy Bottom Line
Can You Buy a House After Bankruptcy?
Yes, you can buy a house after bankruptcy. Declaring bankruptcy doesn’t even mean that you can never get a mortgage loan to buy a house again. Time heals all wounds, and eventually, it can be put behind you. However, bankruptcy will seriously impact your credit score and your ability to get a loan. There is no set rule that says you cannot get a mortgage after bankruptcy. However, all lenders have certain minimum requirements for issuing loans, and having a bankruptcy on record is likely to make it difficult to be approved.
These minimum requirements depend on the lender and the type of bankruptcy. Your chances of approval are better if you’re able to make a higher down payment and accept a higher interest rate on the loan. But even then, there are no guarantees. The best thing to do is to wait for the appropriate amount of time and do what you can to improve your financial situation and work on your credit.
How Long After Bankruptcy Can You Buy a House?
You need to wait between one and four years to be able to get a mortgage to buy a house after declaring bankruptcy. The exact amount of time depends on the type of loan as well as if you filed for Chapter 7 or Chapter 13 bankruptcy. Conventional loans tend to be the most conservative and require the longest amount of time after bankruptcy. In comparison, FHA, VA, and USDA loans are more lenient because the government backs them. Here's an overview of waiting times:
Chapter 7 Bankruptcy
- FHA Loans: Typically requires a 2-year waiting period from the date of discharge.
- VA Loans: Requires a 2-year waiting period.
- USDA Loans: Requires a 3-year waiting period.
- Conventional Loans: Usually requires a 4-year waiting period.
Chapter 13 Bankruptcy
- FHA Loans: Requires a 1-year waiting period with court approval during repayment and proof of at least 12 months of on-time payments.
- VA Loans: Similar to FHA, with a 1-year waiting period during repayment with court approval.
- USDA Loans: 1-year waiting period with court approval.
- Conventional Loans: Typically requires a 2-year waiting period from the date of discharge or 4 years from the date of dismissal.
Chapter 13 vs Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the most common type of bankruptcy filing. When you file for chapter 7 bankruptcy, you are declaring that you cannot repay your debts. You will be required to liquidate many or all of your assets to satisfy your creditors. Certain assets may be protected by state law, but most will go toward paying the debt that you owe. Once all your eligible assets have been liquidated, you will be discharged of all debts, and creditors will be forced to leave you alone. However, it will have a severe impact on your credit score, and it will take 10 years for it to be removed.
Chapter 13 bankruptcy is a restructuring or adjustment of debt. When you file for chapter 13 bankruptcy, you are stating that you can pay your debts, but you need more time to do so. Chapter 13 bankruptcy requires the debtor to develop a debt repayment plan over approximately three to five years to satisfy the debt. A court must approve payment plans, and a bankruptcy trustee must be approved to oversee the repayment. Chapter 13 is less severe and doesn’t always require the liquidation of assets – such as a home. It takes 7 years for a chapter 13 bankruptcy to be removed from your credit report.
Buying a House After a Chapter 7 Discharge
Shopping for mortgage loans after chapter 7 bankruptcy can be challenging. Your credit score can drop as much as 200 points, and traditional lenders will require a certain waiting period before you’ll be able to apply for a mortgage loan. Conventional loans typically require you to wait at least four years before applying for a mortgage. USDA loans require three years and FHA and VA loans only require two years. The clock starts ticking as soon as your debt is discharged. That means the moment the court has accepted your bankruptcy plea and relieved you of the responsibilities of repaying the debt.
However, these are basic guidelines and are not set in stone. If you can fork over a sizeable down payment and accept a high interest rate, you may be able to seek approval sooner. Likewise, you can still be denied even if you wait the appropriate amount of time if your credit score has not improved or you’ve shown continued signs of financial recklessness. A lender is never required to approve you for a loan – especially if it’s a conventional loan. But most will be lenient as long as you’ve shown progress, and you’re willing to agree to the terms they’re offering.
Buying a House After a Chapter 13 Discharge
Getting a mortgage after a Chapter 13 discharge is a bit less difficult, but it’s still not a walk in the park. Lenders are more likely to cut you some slack because you were willing to adjust your debt as opposed to walking away from it. But there are still some limitations that may stand in your way of getting approved for a loan right away.
Most conventional loans will require a grace period of 2 years after the debt is discharged before you can apply for a new mortgage. FHA, VA, and USDA loans all require a year before you can reapply. If your bankruptcy claim is dismissed – meaning the court does not find your repayment plan sufficient and does not order creditors to stop collection – you will be required to wait at least 4 years before applying for a conventional loan.
Keep in mind that with a Chapter 13 bankruptcy, the debt is not discharged as quickly as in a Chapter 7 bankruptcy – which is why lenders require less time before applying for a loan. In a Chapter 13 filing, the plaintiff must complete the repayment plan before the debt is discharged. Whereas in a Chapter 7 filing, the debt will be discharged as soon as all available assets are sold. Therefore, it still takes a considerable amount of time to get a loan after first declaring bankruptcy. However, the process is quicker once the debt has been officially discharged.
How to Get a Mortgage After Bankruptcy
Here are some tips and things you can do to help you get a mortgage after bankruptcy. Remember that as hard as you work to improve your credit, banks and lenders may still require you to wait a certain amount of time after bankruptcy to get a mortgage.
1. Work On Your Credit Score
A bankruptcy itself is not a financial death sentence but failing to learn a lesson and improve is. The best way you can show lenders that you’ve made improvements in your finances is to work on your credit score. There is nothing you can do about the bankruptcy itself until the appropriate amount of time has passed and you’re able to get it removed from the report. But you can continue to pay your bills on time and stay away from hard inquiries. You may choose to consult a credit repair specialist, but be wary of scams. Rebuilding your credit after something like bankruptcy will take time, and there are no easy solutions. But if you make good choices and take the proper steps day by day, you’ll see improvements in your score in no time.
2. Save Money
The best way to make your mortgage application more attractive to a lender is to pay a larger down payment. The reason lenders are cautious about approving applicants with a bankruptcy on their record is because they pose a more considerable risk of defaulting on the loan than average mortgage shoppers. The more you can mitigate that risk, the more likely you are to be approved for a loan. The ability to save money also shows financial maturity and goes a long way toward proving to a lender that you’re not as risky of a client as you once were. Of course, savings will only go so far, and you may still be denied even if you’re able to put up a hefty down payment. But it will improve your chances if you’re willing to put your money where your mouth is.
3. Wait For The Right Time
Timing is everything in real estate. It can make the difference between a profitable investment and a money pit. It doesn’t matter if you’re purchasing a rental property or a home to live in – timing is vital if you want to make a smart investment. This is especially true if you’ve gone through bankruptcy. Although it may be tempting to apply for a mortgage as soon as you’re able, the reality is that lenders will judge you until you’ve had that mark removed. They may hit you with exorbitant interest rates or include other unfavorable terms that will hurt you in the long run. You’ll likely get a better deal if you can rent or secure housing or some form until you can get your credit back into the normal range. It may take some time, but it’s better to be patient and get a more affordable rate than to jump into a loan you can’t realistically afford and risk going bankrupt a second time.