Buying a House After Bankruptcy Is Possible
How to Fix and Flip a Property in 8 Steps

Buying a House After Bankruptcy Is Possible: Here’s How. Roughly 1% of U.S. households file for bankruptcy each year, and many will be eligible to buy a home within 2 years of their bankruptcy discharge.

Here’s why:

  • 62% of bankruptcies are related to medical debt and collection
  • 92% of people who file for bankruptcy never file again
  • Only five percent of bankruptcies get linked to reckless spending

Mortgage lenders know that filing for bankruptcy is sometimes necessary and that consumers aren’t always at fault. So, mortgage rules define a clear home buying timeline so consumers with bankruptcy can stop renting and start owning.

This article discusses how to buy a home after bankruptcy. It discusses the different mortgages, how long after bankruptcy you can buy a home, and the fastest ways to improve your credit to expedite your approval.

Table of Contents

How Bankruptcy Affects Your Ability To Get A Mortgage

Experiencing bankruptcy lowers your credit rating and creates other temporary obstacles to homeownership.

For example, in the first two years after filing for bankruptcy, a home buyer cannot be mortgage-approved through one of the government’s five mortgage agencies. A two-year waiting period is required.

After two years, homeownership pathways widen.

  • 24 months after discharge, FHA and VA mortgages are available to home buyers
  • 36 months after discharge, USDA mortgages are available to home buyers
  • 48 months after discharge, conventional mortgages are available to home buyers

Mortgage lenders don’t discriminate against buyers with bankruptcy. Instead, lenders are interested in the bankruptcy circumstances and how the buyer has managed credit since discharge.

On-time payment histories are required, and credit scores must be in recovery. 

FHA loans require credit scores of 500 or higher, and other government-backed mortgage loans require a minimum 620 FICO score.

Lenders will also confirm that the bankruptcy gets officially discharged by court order and that no new debts got added to the filing.

How Long After Bankruptcy Can You Buy A House?

Most home buyers can get approved for a mortgage 24 months after discharge from Chapter 7 bankruptcy or immediately after discharge from Chapter 13 bankruptcy.

Chapter 7 completely wipes out all debt. Chapter 13 is a reorganization of debt based on a payment schedule. Because of the way the two impact debt, each requires a different waiting period timeline.

Waiting periods for both Chapter 7 and Chapter 13 bankruptcies get reduced for buyers with extenuating circumstances – often by half.

An extenuating circumstance is a one-time event beyond the buyer’s control that reduces income sharply or creates a catastrophic increase in debt.

Common examples of extenuating circumstances include:

  1. Loss of income because of divorce
  2. Loss of income because of job loss
  3. Large medical bills

Claims of extenuating circumstances require supporting documentation and a reasonable explanation for how the event caused the bankruptcy. 

Chapter 7 Bankruptcy Waiting Periods

The waiting period to buy a home after a Chapter 7 bankruptcy ranges from two to four years—depending on your mortgage type.

From the date of discharge:

  • FHA loans: 2-year waiting period
  • VA loans: 2-year waiting period
  • USDA loans: 3-year waiting period
  • Conventional loans: 4-year waiting period

The FHA allows a 12-month waiting period for buyers with extenuating circumstances, and Fannie Mae and Freddie Mac allow a two-year waiting period.

Chapter 13 Bankruptcy Waiting Periods

The waiting period to buy a home after a Chapter 13 bankruptcy ranges from zero days to two years—depending on your mortgage type.

From the date of discharge:

  • FHA loans: No waiting period
  • VA loans: No waiting period
  • USDA loans: 1-year waiting period
  • Conventional loans: 4-year waiting period

A typical Chapter 13 bankruptcy period lasts between three and five years, depending on the amount of debt and the debtor’s annual income. 

With a Chapter 13 bankruptcy, your credit isn’t affected as much as Chapter 7, which stays on a credit report for seven years.

Waiting Period for Each Loan Type (Based on Discharge Date)

Loan Type Chapter 7 Chapter 13
FHA loans 2 years None
VA loans 2 years None
USDA loans 3 years 1 year
Conventional loans 4 years 4 years

What Type Of Mortgage Can You Get After Bankruptcy?

Home buyers can apply for any mortgage after bankruptcy. So long as the buyer meets the required waiting period and credit score minimums, the mortgage can be approved.  

Here are five mainstream mortgage programs for buyers with a recent Chapter 7 or Chapter 13 bankruptcy.

FHA Loans

  • 580 credit score minimum
  • 3.5 percent minimum down payment
  • Shortest waiting period for buyers coming out of bankruptcy
  • Mortgage insurance required
  • Available to everyone

VA Loans

  • 620 credit score minimum
  • No downpayment required
  • Shortest waiting period
  • No mortgage insurance required
  • Available to active military, veterans, and surviving spouses

USDA Loans

  • 580 credit score minimum
  • No downpayment required
  • Lowest interest rates, typically
  • Reduced mortgage insurance required
  • Available in rural areas and lower-density suburbs 

Conventional Loans – Fannie Mae

  • 620 credit score minimum
  • 3 percent downpayment required
  • Subsidized mortgage rates for lower-income households
  • Mortgage insurance required with less than 20% down
  • Longest waiting periods post-bankruptcy

Conventional Loans – Freddie Mac

  • 620 credit score minimum
  • 3 percent downpayment required
  • Subsidized mortgage rates for lower-income households
  • Mortgage insurance required with less than 20% down
  • Longest waiting periods post-bankruptcy

How To Get Better Mortgage Rates After Bankruptcy

Bankruptcies are common and don’t affect a person’s ability to apply for a mortgage. Lenders treat bankruptcies like other credit events. Eligible buyers can still get mortgage-approved.

However, when buying a home after bankruptcy, you can improve your access to lower mortgage rates and low-down payment loans by raising your credit score. 

Take these steps to improve your credit and get pre-approved for a mortgage.

1. Establish new credit

Secured credit cards and credit builder companies like StellarFi help improve credit. These allow you to establish new credit and pay it off in small, manageable payments that creditors like the see.

2. Keep balances low

Once you’ve started to take on new debt, be sure to keep your balances low. You don’t need to pay them off in full. Keeping a low running balance that you pay each month is good because it shows you can manage debt.

3. Pay it off on time

While maintaining new debt, the most important thing is to pay it on time. Missed payments have the most significant impact on your credit score.

4. Get pre-approved

A mortgage pre-approval is like a dry-run of the mortgage process. This pre-approval will prepare you for a mortgage by helping you build a budget, show you rates, and check your credit score. When it comes to buying, a pre-approval will prove to the buyer that you are prepared and serious about your offer.

FAQ About Buying a Home After Bankruptcy

Can I buy a house under my name if my spouse filed for bankruptcy?

Yes, you can apply for a mortgage without your spouse. Your lender won’t consider the bankruptcy filing as part of the mortgage application. However, the application may not use your spouse’s income or assets to help you qualify. 

How long after discharge from Chapter 13 bankruptcy can I buy a home?

Home buyers can buy a home immediately after discharge from Chapter 13 bankruptcy with an FHA-backed or VA-backed loan. A two-year wait is necessary after Chapter 7 bankruptcy.

After a bankruptcy, should I establish credit for a few years or buy a home immediately?

Raising your credit score can get you better rates and access to different types of loans. However, the money you spend on rent while trying to raise your score typically won’t offset the amount you save with a higher credit score.

How long does it take for a bankruptcy to get removed from a credit report?

Although bankruptcies stop affecting credit scores after two years, they remain on credit reports for seven years following a Chapter 13 and 10 years following a Chapter 7. 

Can I buy a second home after bankruptcy?

You can purchase a second home after bankruptcy. Bankruptcy events are treated like other credit events and don’t prevent buyers from getting access to mortgages.

What is the waiting period to buy a home if I’ve had more than one bankruptcy?

Home buyers with multiple prior bankruptcies can wait as long as five years. 

What are examples of extenuating circumstances for bankruptcy?

Mortgage lenders reduce waiting periods after bankruptcies from extenuating circumstances. Extenuating circumstances include loss of income after a divorce, large medical bills or inability to work after injury or illness, and unexpected job joss. 

Source: https://homebuyer.com/


Are you ready to take the next step to buy your home and start building a legacy for your family?…Let me help you!

I am a Brazilian Licensed Realtor at Re-Connect, LLC with 17+ years of experience in the Real Estate industry. I speaks 3 languages (Portuguese, English, Spanish)

CALL NOW: (617) 201-9188 Ana Roque |209 West Central Street, Natick, MA  

 

Related posts:

How to Fix and Flip a Property in 8 Steps

Fixing and flipping a property involves several key steps to ensure a successful outcome. Here's a general guide outlining the process in eight steps:
March 26, 2024

Best Places to Invest in Massachusetts

Determining the best places to invest in Massachusetts depends on various factors such as market conditions, economic indicators[...]
March 22, 2024

What are the cons and pros of modular homes?

What are the cons and pros of modular homes? Certainly! Here's a breakdown of the pros and cons of modular homes, pros: Cost-effective: Modular homes ...
March 15, 2024

What is the best house to build for resale?

March 12, 2024

What part of Massachusetts is best to live in?

The best part of Massachusetts to live in depends on your personal preferences, lifestyle, and priorities.
March 8, 2024

Do you need a business license for a home based business in Massachusetts?

Yes, in Massachusetts, you typically need a business license to operate a home-based business. The specific requirements can vary depending on the nat...
March 5, 2024

Do I Need a Permit to Structurally Modify My Home?

In many jurisdictions, you typically need a permit to make structural modifications to your home. Structural modifications involve changes to load-bea...
February 27, 2024

Some Rules For Foreigners Buying Property In USA

Foreigners buying property in the USA are subject to various rules and regulations. While I can provide some general information, it's important to co...
February 16, 2024

Will 2024 be a better time to buy a house?

“The housing market is off to a good start this year, as consumers benefit from falling mortgage rates,” said NAR chief economist Lawrence Yun in the ...
February 13, 2024

What are the rules for foreigners buying property in the US?

Foreigners can generally buy property in the United States, but there are specific rules and considerations to be aware of. Keep in mind that real est...
February 9, 2024

Single family home for sale

11 Oakview St, Worcester, MA 01605 GREAT LOCATION in a desirable residential neighborhood! Move in ready, well maintained and charming 3 bedrooms ranc...
February 6, 2024

Do banks require mortgage insurance?

Banks typically require mortgage insurance in certain situations, but it depends on the specific circumstances of the mortgage and the borrower.
February 2, 2024

Can a person with an ITIN number get a mortgage loan?

Individuals with an Individual Taxpayer Identification Number (ITIN) could potentially qualify for a mortgage loan, but the process might be more chal...
January 30, 2024

10 Reasons to Work With a REALTOR

Working with a REALTOR (a member of the National Association of Realtors in the United States) can offer numerous advantages when buying or selling.
January 26, 2024