Buying a House After Bankruptcy: How Long Will You Need To Wait?

This article will discuss how long it may take to find a bank willing to issue you a preapproval for a mortgage after a bankruptcy. It’ll also explain why most banks are gun-shy when it comes to approving a bankruptcy filer for a home loan.

If you’ve recently filed for bankruptcy and want to buy a home, speaking with a real estate attorney to discuss your options can be extremely helpful. We’ve also included links to related FindLaw articles at the bottom of this page.

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. The type of bankruptcy filed for may also be a factor.

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 issues managing their money. Bankers fear that someone who filed for bankruptcy once is more likely to file for bankruptcy 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. When you’re hoping to buy a home, that can seem like an eternity. Most mortgages are 30-year loans. Lenders want to see a bankruptcy filer reestablish their credit before they approve them for a mortgage.

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. The question is, why would banks be leery of lending money to someone who files a Chapter 13 bankruptcy?

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 a Chapter 13 bankruptcy, they may have concerns that the person could be predisposed to refile again 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.

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 ten years for the bankruptcy to disappear from their public record is out of the question for many people.

In some cases, bankruptcy can be the first step toward purchasing a house. Once the court discharges your debts, you will be free to take on new loans. 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.

Timing To Buy a Home After Filing Bankruptcy

The general rule is that bankruptcy filers should wait at least a year or two before they attempt to secure a mortgage. It depends on the type of bankruptcy you filed and the type of mortgage you want to secure.

Take a moment to consider these factors before you start your house hunt:

• Did you file a Chapter 7 bankruptcy? The bankruptcy court will discharge your debt, but you may face higher interest rates and greater difficulty finding a mortgage loan.
• Did you file a Chapter 13 bankruptcy? You will have a repayment plan that you must repay on schedule. Can you save a down payment while making these monthly payments?
• Did you keep your car in the Chapter 7 bankruptcy case? Do you still have a car loan? Can you afford to pay your car loan and a mortgage?
• Did you gain credit card debt for a medical bill post-bankruptcy?
• What home loans, interest rates, down payment, and credit score requirements does the mortgage lender require?
• Do you have enough for a down payment? Extra money usually goes to paying back some debt in a Chapter 13 bankruptcy.
• What type of loan do you want?
• What was your discharge date?
• What is the state of your personal finances now?

These are the questions the loan officer use to review your application. This is the case with either a new mortgage or a refinance.

Overview of Home Loans for Bankruptcy Filers

Some agencies have short waiting periods for people who have filed for bankruptcy. Instead of the general two-year waiting period, the following agencies will entertain a shorter period:

• United States Department of Agriculture (USDA)
• Federal Housing Administration (FHA)
• Veterans’ Administration (VA) loans

The clock starts when you get the bankruptcy discharge for whatever type you filed under. In general, you must wait:

• Two years after your discharge date for Chapter 7 bankruptcy for FHA loans and VA loans
• Three years after your discharge date for Chapter 7 bankruptcy for USDA loans
• One year after your discharge date for Chapter 13 bankruptcy for FHA loans, VA loans, and USDA loans

The Department of Veterans Affairs guarantees every VA loan, so a VA mortgage may work best for veterans, or their spouses, after bankruptcy.

The United States Department of Agriculture issues USDA loans. Their rural development program guarantees these loans for lower-income residents of rural areas.

Conventional loans require a longer waiting period between filing for bankruptcy and requesting a home loan.

Is an FHA Loan Right for You?

The Federal Housing Administration issues the only guaranteed home loan. An FHA mortgage can be risky because you can lose your house in foreclosure if you cannot make the mortgage payments.

While there is the risk of foreclosure, an FHA loan may be less risky because the government will pay your mortgage lender if you cannot make the payments. If this happens, you will not be personally responsible for the unpaid loan. Be aware that you will have a foreclosure on your new credit report in addition to the bankruptcy filing.

You must meet the following criteria to qualify for an FHA loan:

• It has been at least two years since you filed for Chapter 7 bankruptcy
• You have made on-time payments for at least one year in your Chapter 13 repayment plan
• The lender agrees to approve the loan (many lenders have strict rules on top of these general rules)
• The bankruptcy court agrees you can take on more debt while you try to establish good credit

Is a Conventional Loan Right for You?

Before you accept any home loan, make sure the type of loan is the best one for you. A conventional loan is difficult to secure after a bankruptcy. Many people prefer a conventional mortgage and are willing to wait the requisite time to apply for one.

A conventional loan can come from three organizations:

• Ginnie Mae: Government-owned loans such as FHA loans, VA loans, and USDA loans
• Fannie Mae or Freddie Mac: Private loans or government-insured loans (often require mortgage insurance)

Lenders will not approve Fannie Mae or Freddie Mac loans if:

• You filed for Chapter 7 bankruptcy within the last four years
• You filed a Chapter 13 bankruptcy within the previous two years
• The U.S. Bankruptcy Court dismissed your Chapter 13 bankruptcy less than four years ago

Banks may reduce the waiting period for a conventional mortgage if there are extenuating circumstances. Things like a divorce, losing your job, or illness or accidents that result in significant medical debt are beyond your control. The bank may reduce your waiting period under these circumstances.

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

While loan waiting periods and loan approval are essential, some loan officers will not consider approving 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 to show that you will make your payments on time. Credit scores can range from 300 to 850.

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

• FHA loan: 500+ (but your down payment is lower if you have 580+)
• VA loan: no minimum credit score (but it is 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

You May Not Be Able To Get a Mortgage Loan

The last thing anyone wants to hear is that they will not qualify for a mortgage loan, but the truth is that it may happen. Factors that can lead to rejection include accumulating significant debt in the months or years following your bankruptcy discharge, or not earning enough to qualify for a traditional loan.

While it’s not easy, patience is often the key to success. If you want to purchase a home badly enough, there are steps you can take to increase your chances of receiving a home loan. Be prepared for it to take a year or two to rebuild your credit, or that you may need to save money for a larger down payment to secure a mortgage loan.

If your financial situation prevents you from qualifying for a home after bankruptcy, talk to a credit counselor or credit repair company. Consider meeting with a bankruptcy attorney to explore your options.

Disclaimer: Bankruptcy and banking laws change frequently due to new legislation, higher court rulings, and other means. While FindLaw strives to provide readers with the most current information, we recommend you consult a local bankruptcy lawyer to confirm the current laws.

An Experienced Bankruptcy Attorney Can Help

If you’re facing issues in 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 seek legal guidance during the bankruptcy journey.

You May Also Like:

• Can You Remove Bankruptcy From a Credit Report?
• What Happens After Bankruptcy?
• FindLaw’s Buying a Home Section