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Jun 05, 2021 | By Adebayo Adeagbo
How to buy a house after bankruptcy

How to buy a house after bankruptcy

Often when people file for bankruptcy, they expect to have to wait seven or even ten years to buy a house. However, this is a myth. Contrary to popular misconception, there are several ways for people who have gone through bankruptcy to qualify for home loans rather quickly.

In fact, it is even possible to buy a house while still in chapter 13 bankruptcy. While bankruptcy has an undeniable effect on one's credit score, it is not always a negative one.

The point of bankruptcy is not to ruin a person's credit for life, nor does it suggest that they can never be trusted with credit again.

Instead, bankruptcy provides a fresh start for people to take control of their finances.

Getting a home loan after a Chapter 13 bankruptcy

Both the VA loan program and the FHA loan program provide a path for people in chapter 13 bankruptcy to buy a house even before discharging the bankruptcy. For both of these programs, 12 months of satisfactory payments (for example: on time and in full) will be required.

To qualify for a USDA loan, which provides money to buy a residence in a rural area, the bankruptcy must be fully discharged, but will require proof that the last 12 months of payments were made on time and in full.

Conventional loans have the longest waiting time frames. Bankruptcy must be either discharged or dismissed and each one has a different requirement. For dismissals, a waiting period of four years is required. For a bankruptcy discharge the waiting period is two years.

Here is a recap of the guidelines for Chapter 13 bankruptcy:

  • VA Loans: Can get a loan a year after filing the Chapter 13. Can be actively in a Chapter 13 bankruptcy as long as 12 months of payments have been made on time and in full (partial payments are not allowed).
  • FHA loans: Can get a loan a year after filing the Chapter 13. Can be actively in a Chapter 13 bankruptcy as long as 12 months of payments have been made on time and in full (partial payments are not allowed).
  • Conventional loans: Can get a loan four years after a dismissal and two years after a discharge.
  • USDA loans: Can get a loan after the bankruptcy has been fully discharged.

Getting a home loan after a Chapter 7 bankruptcy

Individuals who have filed for a chapter 7 bankruptcy can still qualify for VA, FHA, and USDA home loans within just a few years. A conventional loan is also obtainable after a bankruptcy but has a stricter guideline on when someone is eligible.

For both VA and FHA home loans, two years after the bankruptcy has been discharged, it is no longer viewed as a disqualifying factor.

For the USDA loan, the waiting period is three years after the actual discharge date.

Conventional loans have a waiting period of four years after the discharge date and/or the dismissal date.

Here is a recap of the guidelines for Chapter 7 bankruptcy:

  • VA Loans: Can get a home loan two years after the chapter 7 discharge date.
  • FHA loans: Can get a home loan two years after the chapter 7 discharge date.
  • USDA loans: Can get a home loan three years after the chapter 7 discharge date.
  • Conventional loans: Can get a home loan four years after the chapter 7 discharge date.

The key to qualifying after a bankruptcy

Bankruptcy is meant to provide fresh start, so showing that this fresh start is a good one is the first step towards re-establishing good credit.

Re-establishing good credit

Involves opening credit cards and loans (at least three of them), and paying them on time. Do not max out the credit cards, in fact, it's better to not have a balance at all.

Try to open these accounts quickly after the bankruptcy. It takes time for the credit scores to establish a good score. The faster this is done the better your score will be once it's time to apply for a home.

CapitalOne.com is usually a good place to start, as they offer secured credit cards for those who are getting back on their feet and are likely to increase credit limits with a good payment history. There are many other companies that offer secured cards as well.

Keep all new debt obligations in good standing, this includes rental payments. Payment history on rent will be verified when applying for a home loan.

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Saving money

This is the second step. Even if the home loan doesn't require a down payment, it is always a good idea to have some savings, especially after a bankruptcy.

Create a budget that involves calculating your expenses and setting up a monthly savings goal. Putting aside, $100 a month, after 2 years this will give you a total of $2400.

$2400 can pay for inspections, appraisals, unexpected repairs, moving costs. Having savings can also make a big difference when qualifying for a home loan.

Underwriters will provide some leniency to those who have been paying bills on time, and have worked hard at saving money. This is a great, responsible, financial path after having a bankruptcy and underwriters will take note of this.

In conclusion, applying for a home loan after a bankruptcy is doable, be prepared to demonstrate that it was a one time "mistake", and that you've cleaned up your act.

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Multiple Bankruptcy Filings

If you've filed for bankruptcy more than once within the last seven years the waiting periods and qualifying guidelines change.

On a conventional loan, for a borrower with more than one bankruptcy filing within the past seven years, a five-year waiting period is required, starting from the most recent dismissal or discharge date. You may be required to make a larger down payment than someone who just has one filed.

VA loans and FHA loans don't have a specific rule regarding multiple bankruptcy filings. The mortgage underwriter has the discretion to approve a file with multiple bankruptcies. Rule of thumb is to have perfect credit after the bankruptcy and must have two years that have lapsed from the last discharge or dismissal.

Here is a recap of the guidelines for multiple bankruptcies:

  • VA loan: Must be at least 2 years from the last bankruptcy discharge, dismissal.
  • FHA loan: Must be at least 2 years from the last bankruptcy discharge, dismissal.
  • Conventional loan: The waiting period is increased to a minimum of 5 years.

I have multiple bankruptcies. What would help to get loan approval?

Having a perfect payment history and low balances after the bankruptcy would be something that a underwriter would be looking for. Late payments, collections, charge offs. and partial payments are all considered derogatory and would most likely cause a mortgage denial.

I filed bankruptcy and so did my spouse but in different years - Is this considered a multiple bankruptcy?

Since the filings were done individually, this would not be considered a multiple bankruptcy filing.

Exceptions to the rule: extenuating circumstances on bankruptcy

Mortgage underwriters can make exceptions to some guidelines, bankruptcy happens to be one of them. If a bankruptcy was filed due to an event beyond your control, it may be considered an extenuating circumstance.

Extenuating circumstances are only recognized if the problem has been successfully overcome and is unlikely to occur again, but a "divorce", or "losing a job" is not considered extenuating.

What is considered an extenuating circumstance?

An extenuating circumstance are non-recurring events. For example, a serious illness that caused an individual to be hospitalized. Due to this illness, there was a loss in income.

Extenuating circumstances would need to be well-documented. We would require doctors' notes, medical bills, possibly even verification from the employers, or a letter from the bankruptcy attorney, etc.

I have a bankruptcy and a foreclosure.

It is not uncommon to have both a bankruptcy and a foreclosure. The guidelines change when you have both.

If the mortgage was discharged through the bankruptcy than only the bankruptcy waiting periods apply. A copy of the bankruptcy paperwork including all schedules would need to be provided to confirm the mortgage was included.

If you chose to keep the property and the foreclosure is unrelated to the bankruptcy, then both the bankruptcy and foreclosure waiting periods would apply.

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