Image: https://www.pexels.com/photo/beer-bottle-and-statement-bills-7927011/
Having a recent past bankruptcy can make it more difficult to qualify for a mortgage loan, but it doesn’t mean that your home buying journey would be put on hold indefinitely. In fact, you may even be able to get a loan to buy a house in as little as 12 months after bankruptcy. This article will show you how you can buy a house with a prior bankruptcy on your record and how long you may have to wait before you’re able to do so.
Can I Buy a House After Bankruptcy?
There are waiting periods that are the minimum time that lenders require you to wait before you can be approved for a home loan after bankruptcy. However, you’ll still need to meet their other requirements, which can include minimum credit score, income, and debt service levels.
Your credit score is crucial when it comes time to apply for a loan, not just about the chances of being approved, but for the amount that you can borrow and the interest rate that the loan will be. That’s why rebuilding your credit score is one of the most important steps for aspiring homeowners after bankruptcy when getting your finances in order. Following a step-by-step guide to buying a house with bad credit can help you with home loan options even if your credit score isn’t perfect, which is especially the case after a bankruptcy.
Consequences of a Bankruptcy
The impact that a bankruptcy would have will depend on the type of bankruptcy that you filed for. In the United States, an individual can file for one of two bankruptcy types: Chapter 7 or Chapter 13.
A Chapter 7 bankruptcy is the most severe out of the two. It also happens to be the most common type of bankruptcy in the USA. With a Chapter 7 bankruptcy, the debtor’s nonexempt assets are liquidated in order to pay back creditors. This means that you may even lose your home depending on the amount of equity that you own. Once your bankruptcy is discharged, you’ll get a fresh start with no outstanding debt. In return, your credit score will suffer significantly. A Chapter 7 bankruptcy will also stay on your record for up to 10 years.
A Chapter 13 bankruptcy is less severe, and involves a payment plan to repay outstanding debt over a certain period of time. Your assets won’t be liquidated, which means that you won’t lose your home to a foreclosure, but you will need to make repayments towards your debt. A Chapter 13 bankruptcy can be discharged once the payment plan is complete. Chapter 13 bankruptcy also has a negative impact on your credit score, and can stay on your record for up to 7 years.
Mortgage Waiting Periods After a Bankruptcy
You will most likely need to borrow money to buy a home, which means that you will need to apply for a mortgage loan. The minimum waiting period before you can qualify for a mortgage loan depends on whether you filed for a Chapter 7 bankruptcy or a Chapter 13 bankruptcy, and whether or not it was discharged or dismissed.
FHA Loans
According to the Department of Housing and Urban Development (HUD) Handbook, the minimum waiting period for an FHA loan after a Chapter 7 bankruptcy is two years after the bankruptcy has been discharged. This waiting period can be reduced to 12 months after discharge if the Chapter 7 bankruptcy was caused by extenuating circumstances.
The minimum waiting period for a Chapter 13 bankruptcy is one year after the bankruptcy has been filed and payments have been made. This means that you may even be able to get a new FHA loan during a Chapter 13 bankruptcy before it has been discharged, however, you will need to get permission from the bankruptcy court.
VA Loans
Similar to FHA loans, you’ll need to wait at least 2 years after being discharged from a Chapter 7 bankruptcy before you can be approved for a VA loan. A Chapter 13 bankruptcy can allow you to be approved for a VA loan in as little as 12 months after the initial bankruptcy filing date.
USDA Loans
USDA loans have a minimum waiting period of 3 years after a Chapter 7 bankruptcy discharge and 1 year after a Chapter 13 bankruptcy filing. If you had extenuating circumstances that caused your bankruptcy, you may be eligible for a USDA loan in as little as 12 months after a Chapter 7 discharge.
Conventional Loans
Government home loans are more lenient and allow you to be approved for a home loan in less time than with conventional loans. There is a longer minimum waiting period before you can be approved for a conventional loan after bankruptcy.
With a Chapter 7 bankruptcy, you will usually need to wait at least four years after your bankruptcy has been dismissed or discharged. With a Chapter 13 bankruptcy, you can be approved in as little as 2 years after discharge or 4 years after dismissal. Just like with FHA loans and USDA loans, the minimum waiting period can be reduced to 2 years for both Chapter 7 and Chapter 13 bankruptcies if there were extenuating circumstances.
Summary
Having a prior bankruptcy isn’t the be-all and end-all when it comes to getting a loan to buy a house. You can apply for government home loans in as little as 12 months after bankruptcy, and you may even be approved before your bankruptcy has been discharged with a Chapter 13 bankruptcy. Conventional loans require some more time before you can apply. In all cases, the bankruptcy will drop off your record in either 7 years with a Chapter 13 bankruptcy or in 10 years with a Chapter 7 bankruptcy. If you stay on top of your finances and diligently rebuild your credit, you’ll be able to buy a house in no time.