Purchasing a house is a challenge in itself; however, if you recently had to file for bankruptcy, owning a home might seem like a distant dream. When you are overwhelmed by debt, filing for bankruptcy could be your only way out. However, it has some serious consequences that might affect your ability to buy a house post-bankruptcy.
Does that mean you can’t buy a house once your finances are back on track? Not necessarily — with proper planning and patience, you can.
Is it possible to purchase a home after bankruptcy?
Yes, it is. Remember, bankruptcy is meant to free you from crippling debt and give you a fresh start.
You have several options. You can pay cash upfront or get a loan. Both options require patience and financial planning, but the latter is more challenging to get post-bankruptcy.
Your damaged credit score and late payment history can negatively affect your efforts if you need to borrow money. However, these negative effects diminish over time as you rebuild your credit score and repayment history. Additionally, there are conventional loans and government-backed mortgages designed to help bankruptcy filers recover from their financial pitfalls and become homeowners again.
How soon after bankruptcy can you buy a house?
This will depend on several factors. They include:
- Whether you filed for Chapter 7 or Chapter 13 bankruptcy.
- The cause of your bankruptcy
- The type of mortgage loan you qualify for, whether it’s a conventional, FHA, VA, or USDA loan.
- The mortgage lender you use.
Under Chapter 7, all your assets are sold to repay your creditors, and a bankruptcy court wipes out all your qualifying debts. While this type of bankruptcy stays on our credit report for 10 years, you don’t have to wait for a whole decade before you can qualify for a mortgage. As for Chapter 13, you are put under a repayment plan that lasts three to five years.
This allows you to make payments to your creditors, after which your remaining debt is discharged. This sort of bankruptcy stays on your credit report for seven years, but you don’t need to wait for that long before applying for a mortgage to buy a home. After your bankruptcy has been discharged, rebuilding your credit and savings to home-buying level takes time.
Lenders want to know your financial situation is fully recovered and that you can make your mortgage payments before giving you a new mortgage to purchase a home after bankruptcy. As such, they enforce a minimum waiting period before borrowers can apply for mortgages post-bankruptcy. The waiting period for VA and FHA loans is two years, for USDA loans, it is three years, while conventional loans have the longest wait period of four years.
Mortgage loans types
If you don’t have enough money saved up to buy the house with cash upfront, you can get a loan. Your options include:
Federal Housing Administration (FHA) loans
As part of the Department of Housing and Urban Development (HUD), the FHA specializes in offering first-time buyers and people with less than perfect credit opportunities to acquire homes. FHA loans come from private lenders but are guaranteed by the FHA.
Aside from the mandatory two-year wait, you also have to meet the lender’s requirements before qualifying for a loan. You also have to show a positive credit history during the two-year waiting period, have a minimum credit score of 500 – 580, a down payment of 10 – 3.5%, a debt-to-income ratio below 50%, and steady income, and employment expected to continue for three years.
However, even with no real credit history, you can still qualify if you can prove extenuating circumstances caused your bankruptcy, such as spousal death, natural disasters, or serious medical problems. In such instances, they can reduce the waiting period to one year, but you need proper documentation to show you can make these new payments.
Veteran Affairs (VA) Loans
These loans are offered to military veterans through the Department of Veterans Affairs. These loans are attractive because they don’t require a down payment, and there’s no minimum credit score. However, you can only use a VA loan if you are buying a home you will live in most of the time, not a vacation house or investment property.
Other options include getting a USDA loan or a conventional mortgage. For conventional mortgage loans, you need to meet Fannie and Freddie’s requirements and have a credit score of 720 on top of waiting the requisite time after discharging your bankruptcy. However, if you have extenuating circumstances, the waiting period can reduce to two years.
How to improve your chances to purchase a home after bankruptcy
Now that you know it is an option to purchase a home after bankruptcy, you can do a few things to improve your chances.
- Get your bankruptcy discharged.
A bankruptcy discharge releases you from liability on some debts and prevents creditors from attempting to collect on these discharged debts. This eases your overall debt load and is a step closer to ending your bankruptcy case. When enders are vetting your eligibility for a mortgage, this is something they want to see.
- Check your credit report
Your credit report determines your creditworthiness, and ensuring your report is accurate and up to date can make it easier to get a mortgage loan. Watch out for debts that have been repaid or discharged appearing on your report. Legally a creditor cannot report any discharged debt as currently owed, late or outstanding. If these appear on your report, it can hurt your chances of getting a new mortgage, so contact the creditor right away and have it corrected. Also, look for outdated or incorrect information, accounts not linked in your bankruptcy filing listed as part of it, wrong notations for closed accounts, and more.
- Rebuild your credit
Before you can get a new mortgage loan, you have to prove to lenders that you can repay your debts. After filing for bankruptcy, your credit options are limited, but you can rebuild it by:
- Paying your bills on time and in full
- Ensuring your credit report is accurate
- Taking only secured debt such as a secured credit card or installment car loans. Avoid taking unsecured debt such as personal loans, as it comes with higher interest rates.
- Time things right
Lastly, purchasing a house hinges on timing things right. While you may qualify earlier, it is a good idea to wait as you are likely to get better loan terms. Remember, even a small cut in the interest rate can significantly affect your monthly repayments and total costs.
When should you seek help?
Bankruptcy is a regrettable reality for many people; however, it doesn’t have to signify the end. If you are well informed about your options, you can make better choices to build back your credit and become a proud homeowner. At the Van Horn Law Group, our experienced legal team knows how to guide you through these difficult decisions. Give us a call to discuss your situation and let us help you find the path forward and get you a step closer to owning your new home.