If you’ve had to declare bankruptcy, you may feel like you’ll never be able to get your finances in order again. And worse, you may feel like you’ll never have a house of your own again.
But the reality is that bankruptcy isn’t a permanent mark on your financial record. Although your credit score will plummet when you declare bankruptcy, the Consumer Financial Protection Bureau found that those who declare bankruptcy often have higher credit scores when compared to those who try to work out difficult finances without resorting to bankruptcy.
How Long After Bankruptcy Can You Buy A House?
In some cases, you can apply for a mortgage after a bankruptcy after a waiting period of 1 or 2 years. In others, you may have to wait as long as 10 years. It depends on which mortgage you select, the type of bankruptcy you declared and your bankruptcy’s disposition.
Types Of Bankruptcies, Dispositions And Why It All Matters
The most frequently declared bankruptcies for individuals, as opposed to corporations, are filed pursuant to Chapter 7 and 13 of the U.S. Bankruptcy Code. These can result in either a dismissal or a discharge of debt.
Chapter 7 Vs. Chapter 13
A Chapter 7 bankruptcy indicates the debtor is seeking to liquidate their assets and wipe away all debt. The bankrupt emerges from the process with a fresh start and a badly damaged credit history. Some creditors can claim security interests.
For example, your auto loan is secured by your car, and your mortgage by your home, so those assets will be sold, and the proceeds paid to satisfy those debts. Unsecured creditors generally get very little of what they are owed.
In a Chapter 13 bankruptcy, debtors seek a reorganization of their debts and commit to strict repayment plans. Debtors must make payments to creditors, but they don’t lose all their assets and they don’t take as hard of a hit to their credit. That’s because creditors reward debtors who are committed to paying their debts.
Dismissal Vs. Discharge Of Your Bankruptcy Claim
When debtors declare bankruptcy, they are asking the Bankruptcy Court to take over their finances. The immediate impact of the declaration is that the court issues a temporary stay of collection activity. That means foreclosure or auto repossession efforts as well as phone calls and letters must stop while the case is being resolved.
In some cases, the court will dismiss Chapter 7 claims if it determines to repay creditors some or all of what they are owed. The determine the debtor’s income is sufficient, given the cost of living and average incomes in your area. If your bankruptcy declaration is dismissed, you end up back where you started.
If the court accepts a claim for relief, the Chapter 7 filing results in the liquidation of the debtor’s assets and the debts being discharged. That means, that the debtor is no longer a debtor and can begin with a fresh start and much worse credit. With a Chapter 13 bankruptcy, the discharge is usually granted 4 years after filing, as repayment plans typically last 3 – 5 years.
Getting A Mortgage After Bankruptcy: Waiting Periods
Understand it’ll take time to rebuild the trust needed for lenders to consider your application. In most cases, the soonest Rocket Mortgage® can help you refinance your house or get into a new one is 1 year after the discharge or dismissal of your bankruptcy.
The length of the waiting period depends on the type of bankruptcy you filed and the type of loan you want to get.
FHA loans are a pretty good mortgage option after bankruptcy.
Chapter 7 Waiting Periods
A Chapter 7 declaration must have been discharged or dismissed for 2 years prior to application, if a borrower has either reestablished good credit or not incurred new debt. It’s possible an FHA loan will be approved after only 1 year since discharge. That occurs if the borrower shows the bankruptcy was caused by extenuating circumstances, is unlikely to reoccur and they have exhibited an ability to manage their finances since the bankruptcy occurred.
Chapter 13 Waiting Periods
For a Chapter 13 claim, you can apply for a new FHA loan 1 year after dismissal. That’s if you have made court ordered payments on time and have received written permission from the court overseeing your case.
Your application must go through manual underwriting and the lender must be satisfied with your explanation of what led to bankruptcy and why it won’t happen again. Once 2 years have passed since discharge, you are able to apply for a mortgage without manual underwriting.
VA loans are another good option for veterans, active service members and surviving spouses. Your Chapter 7 must be dismissed or discharged for 2 years before you apply for a VA loan.
There’s no waiting period if you filed for Chapter 13 bankruptcy. In fact, you can apply for a mortgage even as you work out a repayment plan with the court.
Unfortunately, if you try to get a conventional loan after bankruptcy, you’re going to have to wait a little longer. Chapter 7 must be dismissed or discharged 4 years prior to application for a conventional loan.
In the case of conventional loans with a Chapter 13 bankruptcy, you must wait 4 years from the date of filing and 2 years from the date of discharge before applying for a conventional loan.
How To Buy A House After Bankruptcy
Here’s a game plan for getting ready to buy a house while you wait for eligibility.
Reestablish Your Credit
Rebuilding credit is a bit like building a house. You must start with the foundation and work your way up.
Rebuild Your Foundation
Get a secured credit card account. With a secured account, you pay in advance an amount equal to your spending limit as collateral. Buy only what you can afford and pay it off at the end of every month.
In effect, you’ll be treating your credit card like a debit card. This behavior will build up your credit every month.
Work Toward Better Debt
To have the best chance of getting a mortgage, you’ll want a history of different types of debt. After a few months of making payments on your secured credit card, you should apply for an unsecured card so you can show responsibility across multiple credit lines.
Both are a type of revolving debt. Next, you can apply for an installment loan, like a car loan. The key is to buy only what you can afford and pay it off at the end of every month.
Keep Your Overall Debt Low
If your bankruptcy was dismissed, pay down your old debt as aggressively as possible. If your debts were discharged, do not take on more debt than you can pay off monthly. You want to prove that you can handle debt responsibly, not that there’s a lender for everybody.
Pay On Time
Make your payments on time. This point can’t be stressed enough. If you were able to get a car loan, set up automatic payments. Set reminders for yourself to pay your bills with plenty of time to spare for delivery where e-payments aren’t possible. Creditors want to see that you have learned from your past mistakes.
Write A Letter Of Explanation
Write a letter to explain the circumstances surrounding your bankruptcy and submit it with your mortgage application. Make sure you detail any underlying problems that led to the bankruptcy and explain how you’ve dealt with them to make sure the same situation doesn’t arise in the future.
Lenders make their money by making loans, so any context you can provide may go a long way toward getting yourself approved.
With the waiting period behind you, your finances in order, and steps taken to reestablish your credit, you can begin the preapproval process. Getting preapproved will give you a clearer idea of what you can afford.
Once you’ve gotten a preapproval letter, you’ll be able to attach a copy of it to any offer you make on a house. It will signal to the seller that you are serious about your offer and that your lender has found you creditworthy.
You will need to submit the following documents:
- Bank statements
- Your recent pay stubs
Be completely upfront about your past difficulties. They’ll be discovered anyway, and very early in the process.
Make Yourself Readily Available For Lender Questions
Your lender may need more information from you than other applicants. Be transparent about your finances, both past and present, and be easy to reach and quick to respond. It will speed up your application process and reflect well on you as your application is being considered.
Summary: Bankruptcy Is A Bump In The Road, Not The End Of The Road
As with any major financial hit, there’s a road to recovery. If you are diligent and disciplined, you can put your bankruptcy behind you and successfully secure a mortgage.
You can chat online with one of our Home Loan Experts about your options or call (888) 728-4702 if you prefer.