Buying A House After Bankruptcy
Buying a house can be a challenge in itself, but if you’ve had to file for bankruptcy, owning a home may seem all the more difficult to achieve. However, it’s still possible regardless of whether you’ve filed for chapter 7 or chapter 13 bankruptcy.
Your biggest hurdles to getting a mortgage will be the mandatory waiting periods after you’ve declared bankruptcy, and rebuilding your credit score to qualify for a mortgage.
In addition, having a lower credit score from your bankruptcy may prevent you from qualifying for the lowest interest rate your lender offers. You may instead need to make a higher monthly mortgage payment or purchase a less expensive home compared to someone with excellent credit. That might feel like a bit of a blow when you’re trying to get your finances back in shape.
Still, the process of buying a home after bankruptcy is feasible. Here’s how.
Can I Buy a House After Bankruptcy?
Yes, you can buy a house after filing for bankruptcy. After all, bankruptcy is meant to help free you from certain debts to provide a fresh start.
You can always buy a home with cash after bankruptcy. However, a bankruptcy becomes more disruptive if you need to borrow money because you’ll have a damaged credit history that reflects your past repayment problems.
In addition to the bankruptcy itself, your credit report will show a history of late payments, judgments and collections associated with the payments you fell behind on. The higher your score was to start with, the more your bankruptcy will have brought it down.
However, the negative effect of your bankruptcy diminishes over time on your record, and you can rebuild your credit score by reestablishing a strong credit history.
How Soon Can I Buy a House After Bankruptcy?
Depending on the type of mortgage you qualify for, your lender, the type of bankruptcy you declared and the cause of your bankruptcy, you may have to wait one to four years after filing bankruptcy. You will also have to wait until your credit score has recovered enough for you to qualify for a mortgage.
First, let’s talk about the two most common types of consumer bankruptcy: chapter 7 and chapter 13. We’ll also show you how long you have to wait before you might qualify for certain common mortgage types.
A chapter 7, or liquidation bankruptcy, discharges your debts. It will stay on your credit report for 10 years, but that doesn’t mean you have to wait 10 years to qualify for a mortgage.
To get a conventional mortgage that meets the requirements from Fannie Mae and Freddie Mac that many lenders follow, you’ll typically have to wait four years from the bankruptcy discharge or dismissal before getting a mortgage if financial mismanagement caused your bankruptcy.
- Dismissal means you petitioned the court to let you enter bankruptcy, and they determined you did not qualify.
- Discharge in a chapter 7 bankruptcy usually occurs about four months after filing.
However, the waiting period goes down to two years if you can document extenuating circumstances that caused your bankruptcy.
The U.S. Department of Housing and Urban Development (HUD) requires borrowers to wait two years from discharge of a chapter 7 bankruptcy before they can qualify for an Federal Housing Administration (FHA) mortgage. The waiting period can be as little as one year if you can document extenuating circumstances.
Like HUD, the Departments of Veterans Affairs (VA) requires borrowers to wait at least two years from the date of chapter 7 discharge before closing on a VA home loan. If only one year has passed but circumstances beyond the borrower’s control caused the bankruptcy, it may be possible to get a VA mortgage before the two-year mark.
If it’s been less than a year, the only circumstance where it might be possible to get a VA mortgage is if the bankruptcy was caused by a self-employed borrower’s business failure, and the borrower has since obtained a permanent position and doesn’t have other credit problems.
For a USDA loan, lenders are required to more carefully scrutinize the application of someone who has a chapter 7 bankruptcy that was discharged less than three years ago. If your bankruptcy was caused by extenuating circumstances that have been resolved and you have reestablished good credit, you may qualify sooner.
A chapter 13 or payment plan bankruptcy gives you three or five years to make affordable payments to your creditors. After that, the bankruptcy court discharges your remaining debts. A chapter 13 bankruptcy stays on your credit report for seven years, but you don’t have to wait seven years to qualify for a mortgage. You will usually need the bankruptcy court’s permission to get a mortgage (or get any other type of loan or credit) during a chapter 13 bankruptcy.
To get a conventional mortgage that meets the requirements from Fannie and Freddie that many lenders follow, you’ll have to wait two years after discharge of a chapter 13 bankruptcy, or four years after a dismissal if your bankruptcy was caused by financial mismanagement. If you had extenuating circumstances, the waiting period is two years from the date of bankruptcy discharge or two years after a dismissal instead of four years.
HUD requires borrowers to wait at least 12 months from the beginning of the chapter 13 bankruptcy pay-out period before qualifying for a mortgage. HUD also requires borrowers to get written permission from the bankruptcy court to get a mortgage.
The VA requires borrowers to be at least 12 months into a chapter 13 plan to qualify for a mortgage.
If you’re applying for a USDA loan within three years of a chapter 13 bankruptcy, you may not qualify if you did not successfully complete your repayment plan. If you have a 12-month history of successfully meeting your new obligations under the plan, you may be eligible.
If a borrower has filed bankruptcy more than once in the last seven years, the standard waiting period grows to five years after discharge or dismissal for a conventional loan that will be purchased by Fannie or Freddie. If extenuating circumstances caused the most recent bankruptcy, the waiting period can go down to three years with Fannie in particular.
However, if you’re applying for a mortgage with another person and you each have one bankruptcy, that doesn’t count as multiple bankruptcies. Also, you could try getting a mortgage from a portfolio lender. These lenders have the freedom to be more flexible in their underwriting guidelines. But that doesn’t mean they’ll give you a loan if you’re a high-risk borrower.
Every loan program makes exceptions for extenuating circumstances but defines those circumstances differently. Depending on what caused your bankruptcy, you may qualify for one loan type sooner than another.
- Fannie Mae. Under Fannie guidelines, an extenuating circumstance is a “nonrecurring event” beyond your control that causes “a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations.” Circumstances such as job loss followed by extended unemployment despite a robust job search, or the onset or significant worsening of an injury, disability or illness, would likely fall into this category, as would a divorce.
- Freddie Mac. Freddie simply defines extenuating circumstances as “factors clearly beyond the control of the borrower”—as opposed to “financial mismanagement,” or “the borrower’s disregard for the payment of obligations when due.”
- FHA. Under FHA guidelines, an extenuating circumstance is an “economic event” that reduced your household income by 20% or more for at least six months.
- VA. VA guidelines describe extenuating circumstances as things like unemployment, a prolonged labor strike or medical bills not covered by insurance. Unlike Fannie, the VA does not put divorce into this category.
- USDA. The USDA wants to know that the circumstances were beyond your control and unlikely to recur. For example, job loss, delay or reduction in benefits, illness or dispute over payment of defective goods or services. If the loan will reduce your shelter costs, that may also be a reason to approve your application before three years have passed.
For any type of loan where you’re claiming that extenuating circumstances caused your bankruptcy, you will need to show your lender documents that back up your claim. These documents might include a job layoff or severance letter, tax returns, medical bills or a divorce decree.
What Types of Mortgage Can I Get After Bankruptcy?
After bankruptcy and after fulfilling the required waiting period, you can get a conventional mortgage that follows Fannie’s or Freddie’s guidelines. You can also get an FHA mortgage, which you may have an easier time qualifying for because it has a lower minimum credit score requirement and shorter post-bankruptcy waiting periods. VA loans and USDA loans may be available to you as well if you meet the requirements.
How to Apply for a Mortgage After Bankruptcy
Applying for a mortgage after bankruptcy is not fundamentally different than applying for a mortgage without a history of bankruptcy. It just might take a bit more effort and paperwork to convince lenders that you can be trusted with a large loan.
Your credit reports and scores will need to demonstrate to lenders that you’ve been able to manage credit responsibly since your bankruptcy. By making required monthly payments on time, paying down remaining debts and limiting new debt, you’ll be able to rebuild your credit score and establish a positive credit history. Getting a secured credit card can help you rebuild credit with minimal risk.
Some lenders may allow you to use nontraditional credit, such as evidence of on-time rental payments, utility payments, cell phone payments and insurance payments that aren’t automatically deducted from your paycheck to qualify for a mortgage.
But if the lender follows Fannie guidelines, you must be able to qualify with a traditional credit history and score to get a conventional mortgage after a bankruptcy. By comparison, to get an FHA mortgage, you can show that you’ve either reestablished good credit or chosen not to incur new credit obligations.
If you feel you need help with your credit score, you might consider using a credit repair company. But you might also find that after learning more about how credit scores work, you can fix your credit yourself.
Letter of Explanation
Your credit report doesn’t tell lenders whether the problem that pushed you into bankruptcy was an event beyond your control, poor financial management or a little of both. If you are applying for a mortgage within the extenuating circumstances timeframe after a bankruptcy, the lender may ask you for a letter of explanation. Your letter should include the following information:
- Date and type of bankruptcy filing
- Reason for filing
- Evidence of reason for filing
- Explanation of the change in circumstances that now makes it possible for you to afford a mortgage and associated expenses of being a homeowner
If you can make a strong case that the events that caused your bankruptcy were out of your control and have been fully resolved, you may be able to get approved for a mortgage, especially if you can demonstrate financial strength in other areas such as your credit score, debt-to-income (DTI) ratio and cash reserves.
What You Need For Preapproval
With or without a history of bankruptcy, you’ll need good enough credit to get preapproved. Here’s what that means for each loan type.
- Conventional Fannie/Freddie mortgage: 620
- FHA loan: 500 with at least 10% down; 580 with at least 3.5% down
- VA or USDA loan: No minimum, but you are more likely to get approved with a score of at least 640
Gather these documents before you apply so lenders will be able to quickly make a preapproval decision on your loan.
- Your Social Security card
- Employment W-2 forms from the last two years
- Pay stubs from your last two pay periods
- Your two most recent statements from your bank and investment accounts
- Tax returns from at least the past two years
- Bankruptcy documents
- Bankruptcy letter of explanation and any documentation of extenuating circumstances
Finally, if you’re an independent contractor, self-employed or a business owner, you will need to provide 1099 forms and/or profit and loss statements instead of W-2 forms and pay stubs.