How Soon Can You Buy a House After Bankruptcy?
Do you or your loved one have a bankruptcy record? If so, you may feel like everything needs to be put on hold, including doing essential things like buying a house. However, it’s not the end of the road. So, how soon can you purchase a home after bankruptcy?
It depends on the type, cause of bankruptcy you file, and the date you file. Once you file for bankruptcy, you will need one to four years to buy a house. In addition, your financial record and credit score will determine the type of mortgage that you are able to take.
Although bankruptcy does not prevent you from buying a house, most loan lenders and real estate mortgage brokers have specific waiting periods set. Also, there are certain restrictions to attaining a home loan if you already have bankruptcy on your financial record.
However, whether you have filed a Chapter 7 or Chapter 13 bankruptcy, a bankruptcy attorney can assist you in getting a home in bankruptcy by negotiating with home loan lenders on your behalf. In addition, your bankruptcy attorney works to ensure that your former debts do not affect your new debt guarantee after your repayment program.
How Do You Get a Mortgage/ Loan After Filing for Bankruptcy?
If you file a Chapter 7 bankruptcy, you will need about two to four years for the court to dismiss your bankruptcy and qualify for a loan or mortgage. After the bankruptcy is dismissed, you will also need time to recover your credit score and improve your financial record.
A Chapter 13 bankruptcy is meant for individuals with a steady income and a court-ordered repayment plan. When you file a Chapter 13 bankruptcy, you need to work with a trustee entrusted by the bankruptcy court.
Your attorney can create a repayment plan to ensure you repay your creditors on scheduled payments over three to five years. After completion of the repayment plan, all the remaining debts are discharged.
Different Mortgage lenders will need the financial situation records to determine if you will repay on time. Each lender imposes their restriction, and some oversee the minimum waiting period set by the FHA before a borrower applies for a mortgage after declaring bankruptcy.
Here are the minimum waiting periods for each loan program after you file for bankruptcy:
According to Fannie Mae and Freddie Mac home mortgage companies, to get conventional loans, you must wait four years from when the bankruptcy is dismissed or discharged. For your bankruptcy to be dismissed, you may have filed a petition in court for bankruptcy where they termed you as ineligible.
On the other hand, after filing bankruptcy Chapter 7, you achieve a court discharge in four months. However, if you document extenuating circumstances as the reason for your bankruptcy, the waiting period is reduced to two years.
To get a conventional loan for a Chapter 13 bankruptcy, you will have to wait two years after a discharge or four years after dismissal. The rule applies if your bankruptcy was a result of financial mismanagement. However, if the reason for bankruptcy was extenuating circumstances, the minimum waiting period is two years from the date of bankruptcy discharge or dismissal.
These are Loans subsidized by the Federal Housing Administration (FHA). To get an FHA loan, the borrowers must wait two years after the discharge of a Chapter 7 bankruptcy to qualify. But if extenuating circumstances caused your bankruptcy, this can be reduced to one year.
To get an FHA loan, the United States Department of Housing and Urban Development (HUD) requires Chapter 13 bankruptcy borrowers to wait a minimum of 12 months from the beginning of the pay-out period before they qualify for the mortgage. Another requirement is a written permit from the bankruptcy court.
The US Department of Veterans Affairs (VA) requires a borrower to wait for at least two years after Chapter 7 is discharged by the court. However, if you document an extenuating circumstance that leads to bankruptcy, you may qualify for a mortgage before the end of two years.
When you are self-employed, and your business failure leads to bankruptcy, you must prove that you have regained a stable financial position.
The US Department of Veterans Affairs also requires Chapter 13 borrowers to have completed a loan repayment plan for at least 12 months to qualify for a loan.
While USDA loans are planned to boost renewal and community development, lenders carefully inspect applications for Chapter 7 bankruptcy. A borrower needs to wait for three years. Still, if the reason for bankruptcy is extenuating circumstances and you have improved your credit situation, you may qualify for an earlier loan.
The United States Department of Agriculture’s Rural Development (USDA) guarantees USDA loans for lower-income applicants. After one year of on-time monthly repayments in a Chapter 13 plan, you qualify for a USDA loan. But if you still need to complete the repayment plan after three years, you will not be eligible for a loan.
What Credit Score Do You Require to Buy a House?
Depending on the type of bankruptcy you have declared, and after your repayment program is done, you will need to meet credit score requirements to qualify for a mortgage. The period will differ depending on the two types of consumer bankruptcy you have filed: Chapter 7 and Chapter 13. In addition, different loan lenders have different credit scores, as you will see below:
- A conventional mortgage requires a 3% down payment and a minimum of a 620 credit score. After achieving 20% home equity, you qualify to cease paying mortgage insurance (PMI).
- FHA mortgage is more suitable for first-time homeowners with a Chapter 7 bankruptcy in their credit history. FHA loans have a 3.5% down payment and a minimum 580 credit score requirement. In addition, you are required to pay mortgage insurance premiums (MIP) during the loan repayment term.
- The VA mortgage/loan has a 0% down payment. Still, to be eligible for a VA loan, you must be a veteran, service member, Reservist, or National Guard member or member of an associated group and eligible surviving spouses of deceased veterans.
- USDA loans require a minimum credit score of 640 to purchase a home in qualifying rural areas.
How Can You Buy a House After Bankruptcy?
After the court discharges or dismisses the filed bankruptcy and the court releases you from all liabilities, you need to meet specific requirements to qualify for a home mortgage/loan. You need to:
- Repair your credit report and ensure that it is up-to-date
- Draft your bankruptcy explanation letter to present to your mortgage lender
- Rebuild your credit report by getting a secured credit card
- Choose the right time to apply for a mortgage to get a minimum repayment interest
- Ensure that you qualify for the mortgage before you apply by checking your lender’s minimum credit score
- Follow up on your lender to ensure your loan processing goes smoothly