If you are considering filing for bankruptcy, you may be worried whether this bankruptcy will impact your ability to buy a home. How long after bankruptcy can you buy a home? Although bankruptcy will lower your credit score and affect your ability to buy a home, you may be eligible to qualify for certain mortgages between two to four years after your bankruptcy is discharged, depending on five factors:
- The type of bankruptcy you filed
- The type of loan you will apply for
- Your credit score
- Whether there are extenuating factors
- Whether foreclosure is involved
Chapter 7 vs. Chapter 13 bankruptcy
For most individuals, there are two types of bankruptcy petitions: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is often referred to as liquidation. Here, the bankruptcy trustee will sell your non-exempt assets to pay off your creditors. Even if your non-exempt assets are insufficient to pay off your credits, you will still get a discharge of your debts. The process is immediate and can be completed within four to six months.
A Chapter 13 bankruptcy, in contrast, is more akin to a debt repayment plan. Taking into consideration your monthly income, the trustee restructures your debt and provides you with a payment plan that you must strictly observe for three to five years. After this period, any debt remaining is discharged.
Most lenders consider Chapter 13 bankruptcy as more favorable than a Chapter 7 bankruptcy because an individual in a Chapter 13 bankruptcy still commits to paying his creditors under the payment plan and not simply requesting for a discharge of debts. Getting a mortgage under Chapter 13 bankruptcy while you are still under the payment plan is a little bit more difficult, however, because it requires the approval of the bankruptcy trustee.
The type of loan you may be able to get
Generally, there are two types of mortgages: government-backed and conventional loans.
Under government-backed mortgages, there are three types: FHA loans, VA loans, and USDA loans.
The FHA loan is a home purchase insured by the Federal Housing Administration. If you default, the federal government pays the mortgage lender. For a Chapter 7 bankruptcy discharge, you need at least two years from the time of discharge. For a Chapter 13 bankruptcy, there is no need of a discharge. You only need one year of on-time monthly payments to the trustee in your monthly payment plan
A VA loan is a loan available only to eligible military veterans, and in some special cases, to the spouse of a deceased veteran. The VA loan is guaranteed by the Department of Veterans Affairs. Here, the waiting period is similar to the FHA loan: two years from Chapter 7 bankruptcy discharge or one year of on-time monthly payments in a Chapter 13 bankruptcy.
The USDA loan is available to lower-income applicants in certain rural areas and is guaranteed by the US Department of Agriculture’s Rural Development Program. The waiting period is three years from discharge in a Chapter 7 bankruptcy or one year of on-time monthly payments in a Chapter 13 bankruptcy.
These waiting periods can be shortened if you the reason you filed for bankruptcy is due to extenuating circumstances. Extenuating circumstances refer to events beyond your control, such as divorce, loss of job, or a medical illness. It does not apply when the reason for bankruptcy is due to your own actions, such as an uncontrolled Amazon spending habit.
Conventional loans are loans that are pooled as bonds and sold to private investors by Ginnie Mae, Fannie Mae, and Freddie Mac. The waiting period to purchase a home using a conventional loan under Ginnie Mae, Freddie Mac, or Fannie Mae is four years after discharge from a Chapter 7 bankruptcy and two years after discharge in a Chapter 13 bankruptcy or four years after dismissal in a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, a petition is dismissed when the individual does not strictly observe the payment plan provided by the bankruptcy trustee.
Some conventional loans are not sold to Ginnie Mae, Fannie Mae, and Freddie Mac, and so these banks have complete discretion on loan terms to individuals who have previously filed for bankruptcy.
Just because you have observed the waiting periods mentioned above does not mean you are automatically eligible for these housing loans. The most important factor the lender will look at is your credit score.
The credit score required for the different types of loans
Your credit score after bankruptcy is the most important factor lenders will look at when determining whether the extend a mortgage to you.
The credit score required is based on the type of loan you are applying for:
For a FHA loan, your credit score must be at least 580. However, you may be eligible for a mortgage even with a lower credit score, but you might have to pay a higher upfront downpayment for the house.
Although there is no minimum credit score set for VA loans, VA loans do not typically require a downpayment, and for this reason, a higher credit score of at least 620 is advisable to get this loan since the lender wants to make sure you will be able to pay.
A credit score of at least 640 is typically required for a USDA loan, but you may get a loan even with a lower credit score depending on the consultant.
Fannie Mae or Freddie Mac loans
These lenders will usually not accept you unless you have a credit score of at least 620.
How to build up your credit score after bankruptcy
If you are determined to buy a house after bankruptcy, you must use the waiting period to build up your credit score. Here are some tips to consider:
Get copies of your credit reports and check for mistakes
There are three major US Credit bureaus: Experian, Equifax, and TransUnion. Get a copy of your credit report and credit score and check it page by page for any errors. If you see any errors, you can send a dispute letter to the bureau, providing as much documentation as you can. You should also contact the bank or medical provider that provided the error and ask them to correct it so that you are information can be updated with the bureau. Once the error is correct, you should immediately see an increase in your score.
Pay on time
Lenders like to see that you are financially responsible after a bankruptcy. Regular on-time monthly payments will improve your credit score. If you have made a late payment or two in isolated circumstances, it will reflect in your credit score. Try to talk to the provider to see if they can remove this from your credit report. Some will agree to do this for accidents and small errors, if you don’t have a history of late payments.
Apply for a credit card and increase your credit limit
Apply for a credit card post-bankruptcy in order to establish credit. If you are unable to get a credit card, you can get a secured credit card by making a deposit, and thereafter, making timely monthly payments. Once you have a credit card, increase your credit limit but maintain your current spending. Increasing your credit limit will improve your debt to credit ratio.
Extenuating circumstance – 12 months
As previously discussed, your waiting times after bankruptcy may be shortened if you filed for bankruptcy due to extenuating circumstances. Generally, an extenuating circumstance is an event that is beyond your control. Examples of extenuating circumstances are temporary job loss, medical illness that led to an expensive medical bill, or death of the income-generating spouse. Having an uncurbed spending habit is not an extenuating circumstance.
In order to be considered an extenuating circumstance, such must have occurred within 12 months prior to filing for bankruptcy.
How long do you have to wait if there’s a foreclosure on your record
If your property was foreclosed prior to filing for bankruptcy, this foreclosure can affect your waiting times. For example, you will need to wait 3 years for FHA and USDA loans and 2 years for VA loans, counted from date of foreclosure until the date you apply for a loan. Extenuating circumstances or a higher downpayment may shorten the period.
There is still life after bankruptcy. You can still buy a home after bankruptcy, but you need to ensure that you are able to build up a strong credit score post-bankruptcy to show to lenders that you are financially responsible and have the capacity to be able to buy and pay for the monthly mortgage payments of a home. Some bankruptcy lawyers work with mortgage lenders who can help you get a mortgage and purchase a house after bankruptcy. Should you need assistance in any bankruptcy matter, we, at the law offices of Albert Goodwin, are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at firstname.lastname@example.org.