Guide To Buying A House After Bankruptcy
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 drop significantly 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 immediately after a bankruptcy is discharged or dismissed. In other cases, you can get a mortgage after a waiting period of 2 or 4 years after discharge or dismissal. In still others, you may have to wait as long as 7 years. It depends on which mortgage you select, the type of bankruptcy you declare and your bankruptcy’s disposition during your post-bankruptcy period.
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 party emerges from the process with a fresh start and a significantly impaired 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. You may have the option of keeping your home if you can reaffirm your debt. This allows you to keep making payments and not include it in the bankruptcy. Unsecured creditors generally get very little of what they’re 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’re 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 debtors have the ability to repay creditors some or all of what they are owed. The court determines 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 bankruptcy filing results in the liquidation of the debtor’s assets and the debts being discharged. This is referred to as a bankruptcy discharge, which means that the debtor is no longer a debtor (at least for the items included in the bankruptcy) and can begin with a fresh start, albeit with a substantially lower credit score. 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 earliest Rocket Mortgage® can help you refinance your house after bankruptcy or get into a new one is 2 years after the discharge or dismissal.
The length of the waiting period depends on the type of bankruptcy you’ve filed and the type of mortgage loan you want to get.
Federal Housing Administration (FHA) Loans
FHA loans are a pretty good mortgage option for most post-bankruptcy borrowers, whether they’ve filed for Chapter 7 or 13 bankruptcy.
Chapter 7 Waiting Periods
A Chapter 7 declaration must have been discharged or dismissed for 2 years prior to a borrower’s FHA loan application. During that waiting period, you must have also either reestablished good credit or not incurred new debt.
Chapter 13 Waiting Periods
For a Chapter 13 claim, you can apply for a new FHA loan after dismissal. To do so, you must 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’re able to apply for a mortgage loan without manual underwriting.
Department Of Veterans Affairs (VA) Loans
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 to apply for a VA loan if you’ve been discharged or dismissed for Chapter 13 bankruptcy.
Unfortunately, if you try to get a conventional loan post-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. In this scenario, you have to keep in mind that conventional loans have higher credit standards, which is why some post-bankruptcy borrowers pursue an FHA, VA, USDA or other government-backed loan program.
How To Buy A House After Bankruptcy
Your credit score will take a significant, detrimental hit with a bankruptcy living on your credit report. Not to worry, though: You can still get a home loan after bankruptcy. Here’s a game plan for getting ready to buy a house by building your credit back up 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 back up to your lender’s minimum credit score and history requirements.
Rebuild Your Foundation
Get a secured credit card account. With a secured account, you pay in advance an amount equal to your credit limit as collateral. You should 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.
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.
Pay On Time
Make your monthly payments on time. This point can’t be stressed enough. If you were able to get a car loan or other installment loan, consider setting up automatic payments. Also, it’s good to 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’ve learned from your past mistakes.
Write A Letter Of Explanation
Write a letter to explain the circumstances surrounding your bankruptcy, and submit the letter with your mortgage application when you ask for preapproval. 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. Every time they issue a loan, they’re taking a risk, 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’re serious about your offer and that your lender has found you creditworthy.
You’ll need to submit the following documents:
- Bank statements
- Your recent pay stubs
- Have 2 years of tax returns available upon request.
It’s best to 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. This will speed up your application process and reflect well on you as your application is being considered.
The Bottom Line: You Can Buy A House After Bankruptcy
As with any major financial hit, there’s a road to recovery. If you’re diligent and disciplined, you can put your bankruptcy behind you and successfully secure a mortgage.
Get started with Rocket Mortgage® today to get preapproved or discuss your options with one of our Home Loan Experts at (888) 452-0335.