How Soon Can You Buy a House After Bankruptcy?

Life can return to normal after filing bankruptcy, even when it comes to getting a mortgage. While it’s normal to expect a delay in applying for a home loan after a bankruptcy discharge, it might not be as long as many would believe.

In general, people who file for bankruptcy have to wait about one to two years after their discharge date to buy a home. Banks may be reluctant to lend money to people who have filed a recent bankruptcy because they fear they won’t be able to repay the loan, but that doesn’t mean a mortgage offer won’t ever be available again. Since there are limits on how often you can file a Chapter 7 or Chapter 13 bankruptcy, mortgage companies know that the odds of a borrower filing for another bankruptcy in the immediate future are low.

This article explores and explains your mortgage options after filing for bankruptcy. It also discusses how filing for bankruptcy can affect your eligibility for a home loan program. If you recently filed for bankruptcy and are wondering about your loan options, it can be helpful to speak to an experienced bankruptcy attorney.

Is There a Waiting Period To Buy a Home After a Bankruptcy Discharge?

Most property owners who file for bankruptcy want to keep their home and file for a Chapter 13 bankruptcy. For the most part, people looking to buy a home after bankruptcy are those who received a Chapter 7 discharge.

In a Chapter 7 bankruptcy, the court discharges most, if not all, of your debt. Once your bankruptcy is complete, you can acquire new debt. That may make many lenders wary of approving loans for people who recently filed bankruptcy, especially mortgage lenders.

While there is no legal or technical waiting period to apply for a home loan, it makes sense to rebuild credit before applying for a mortgage. Banks will want to see your payment history on any mortgages or loans you have prior to filing for bankruptcy. If the bank’s underwriting department sees that your home was in foreclosure or that you had to file bankruptcy within the last couple of years, it will most likely reject your application.

Within weeks or months of your bankruptcy discharge, you’ll start receiving pre-approval notices from credit card companies, auto lenders, and mortgage companies. Unfortunately, these pre-approval letters do not guarantee that the finance company will approve you for a loan. In many instances, these offers are made by predatory lenders that charge outrageous interest rates and impose onerous terms.

For these reasons, most bankruptcy lawyers recommend that you wait a year or two before you try to buy a new home. The waiting period largely depends on the type of bankruptcy you filed and the type of mortgage you want to obtain.

The Type of Bankruptcy You File Impacts How Long You Should Wait To Buy a House

The type of bankruptcy you file will determine how long you must wait to take out a mortgage. In general, lenders require borrowers to wait one to two years after a Chapter 13 bankruptcy discharge and two to three years after a Chapter 7 bankruptcy discharge for government-backed loans such as FHA, VA, or USDA mortgages.

For conventional loans, the waiting period is often longer. Some lenders may approve a mortgage sooner than the above timeframes if you can demonstrate extenuating circumstances. 

It’s also easier to get a mortgage when the purchase price of the house is lower. The hope is that you won’t require any down payment assistance and that a modest mortgage will be within your means. Working hard to repair your credit score also increases your chances of approval and homeownership.

How and Why Bankruptcy Hurts Your Chances of Getting a Mortgage

Regardless of which type of bankruptcy you file, getting a mortgage after your discharge may be difficult. This is especially true for first-time homebuyers. A bank wants to know that a borrower can repay their loan before they’ll approve them for a mortgage.

Seeing a bankruptcy on an applicant’s credit report is a red flag for mortgage lenders. A bank is much more likely to approve a mortgage for someone with no bankruptcies on their credit report than someone who filed a Chapter 7 or a Chapter 13 bankruptcy. Let’s take a closer look at the two types and what their differences may mean.

Borrowers With a Chapter 7 Bankruptcy on Their Credit Report

Mortgage loans are often the biggest loan a borrower will commit to in their lifetime. When prospective homeowners have a Chapter 7 or Chapter 13 bankruptcy on their credit history, banks are hesitant to lend them money.

When a loan officer sees a Chapter 7 bankruptcy on someone’s credit report, it raises concerns that the borrower has a problem managing their money. Bankers fear that someone who has filed for bankruptcy once is more likely to file again, and they don’t want to end up with a large unpaid loan.

Under federal bankruptcy law, you must wait at least eight years to refile for Chapter 7 bankruptcy. That can seem like an eternity when you’re trying to buy a home. Most mortgages are 30-year loans, and lenders want to see a bankruptcy filer reestablish their credit before they approve them.

It makes sense that banks would be reluctant to approve a mortgage for someone who filed a Chapter 7 bankruptcy. Chapter 7 filers don’t have to repay their debts once the court approves their bankruptcy petition.

Applicants With a Chapter 13 Bankruptcy on Their Credit History

If you file for Chapter 13, the bankruptcy trustee designs a short-term repayment plan, usually lasting three to five years. While people who file for Chapter 7 receive a discharge for their outstanding debts, that isn’t the case for people who file for Chapter 13.

With a Chapter 13 bankruptcy, the trustee will look at your total debts and assets and determine how much (if any) of your debts you must repay. Secured creditors, such as mortgage companies and auto lenders, take priority. They usually recover most of the money they lent the filer.

Unsecured creditors, such as credit card companies, often receive a percentage of what the debtor owes. It depends on how much the bankruptcy trustee believes the filer can afford to repay while still having money to pay for necessities.

When a mortgage lender sees that someone filed for Chapter 13 bankruptcy, they may be concerned that the person could be predisposed to refile if they encounter financial issues. They may also fear that the person will be unable to afford their mortgage while on their Chapter 13 repayment plan. No loan officer wants to approve a loan that will never be paid.

You May Need a Credit Score of 500 or Higher To Buy a House

While loan waiting periods and loan approval are essential for people with a recent bankruptcy, some loan officers will not consider giving you a mortgage until you improve your credit score. This can take time and may require that you open a secured credit card and make on-time payments for a year or longer. You may also consider taking out a small personal loan through your credit union or local bank to show that you can make your payments on time. 

Credit scores can range from 300 to 850. The type of loan you seek will determine the credit score requirements to qualify for a mortgage.

For each type of loan below, you need the following minimum credit scores:

• FHA loan (Federal Housing Administration): 500+ (but your down payment is lower if you have 580+)
• VA loan (Department of Veterans Affairs): no minimum credit score, but it’s advised to have at least 620
• USDA loan: 640+ (if your credit score is lower, it may be up to the loan officer)
• Fannie Mae or Freddie Mac: 620-640 is the lowest they will accept

Nobody expects you to have good credit immediately after filing bankruptcy. Most filers understand that they’ll have to make a larger down payment and pay higher interest rates to get approval on a new mortgage. You can always refinance your loan later for a better interest rate and lower monthly payments.

Once you prove that you can make your mortgage payments on time, there’s a good chance you’ll qualify for a conventional mortgage with much better terms. Buying private mortgage insurance may also help your cause when it comes to getting a new mortgage.

There Is Light at the End of the Tunnel

A Chapter 7 or Chapter 13 bankruptcy will negatively affect your credit score, but that doesn’t mean you can’t own a home while you work to improve your credit. Waiting seven to 10 years for the bankruptcy to disappear from your public record is out of the question for many people.

In some cases, filing for bankruptcy can be the first step toward purchasing a house. Once the court discharges your debts, you will be free to take on new debts. While it’s not wise to go wild following your bankruptcy discharge, there’s nothing wrong with taking advantage of your fresh start. The best option is to slowly and gradually acquire new loans and credit cards so that, in the long run, you improve your credit score enough that a mortgage lender will agree to finance your home.

If you use a bankruptcy attorney, they may know real estate agents and mortgage lenders who work with people who have a bankruptcy on their credit history. This is definitely something you can discuss with your lawyer throughout your bankruptcy proceedings.

An Experienced Bankruptcy Attorney Can Help

If you recently filed bankruptcy and are having trouble with the home-buying process, contact a local bankruptcy attorney to learn about your options. A new home may be attainable within one to two years after bankruptcy if you take the right steps and have solid legal guidance.