In the United States, around one percent of families file for bankruptcy protection each year. Many of these individuals will be able to qualify to purchase a home within the first two years following their release. This is because bankruptcies often result from medical bills and collections, which account for 62% of all bankruptcies.
Additionally, over 92% of those who file for bankruptcy do not do so again, and only 5% of bankruptcies are directly attributed to careless spending. Mortgage companies understand that bankruptcy is often a last resort and have established regulations to allow consumers who have filed for bankruptcy to become homeowners again after a certain period of time.
This article will provide information on the various mortgages available to those who have filed for bankruptcy, the length of time required to purchase a home following bankruptcy, and the quickest ways to improve credit.
How Bankruptcy Affects Your Ability To Get A Mortgage?
Filing for bankruptcy can significantly impact a person’s credit score and make it more difficult to secure a mortgage in the short term. Federally-backed mortgage firms have a mandatory 2-year waiting period after a bankruptcy filing during which a potential home buyer cannot get a mortgage. However, opportunities to become a homeowner may expand after this waiting period.
For example, homebuyers may be eligible to apply for an FHA or VA mortgage up to 24 months after their bankruptcy discharge, or a USDA mortgage up to 36 months after a service member’s release. Homebuyers may also qualify for a traditional mortgage 48 months after their bankruptcy discharge. Lenders will consider a buyer’s credit history and history of bankruptcy, as well as their ability to rebuild credit and make on-time payments.
To qualify for an FHA loan, a minimum credit score of 500 is required, and a minimum score of 620 is required for other government-backed mortgage loans. Lenders may also require that no new obligations have been incurred after the bankruptcy filing and that the bankruptcy has been discharged by a court order.
How Long After Bankruptcy Can You Buy A House?
After filing for bankruptcy, borrowers may be able to apply for a mortgage either immediately or after a certain waiting period, depending on the type of bankruptcy they filed. Chapter 7 bankruptcy involves the discharge of all debts, while Chapter 13 bankruptcy involves the restructuring of debts into a more manageable payment plan.
As a result, the waiting periods for these types of bankruptcy may differ. In general, borrowers may apply for a mortgage immediately following a Chapter 7 bankruptcy discharge or after waiting 24 months following a Chapter 13 bankruptcy discharge. However, these waiting periods may be shortened for borrowers who can demonstrate extenuating circumstances, such as a sudden drop in income or a significant increase in debt due to events beyond their control, such as unemployment, costly medical care, or divorce.
To qualify for a shortened waiting period, borrowers must provide evidence and an explanation of how these circumstances led to their bankruptcy filing.
Chapter 7 Bankruptcy Waiting Periods
It is important to note that the waiting periods for obtaining a mortgage after filing for Chapter 7 bankruptcy may vary depending on the type of mortgage and the lender’s policies. In general, however, borrowers may have to wait a certain amount of time before they are eligible to apply for a mortgage. Here are some general guidelines for waiting periods after a Chapter 7 bankruptcy discharge:
- FHA loans: 2 years
- VA loans: 2 years
- USDA loans: 3 years
- Conventional loans: 4 years
Keep in mind that these are just general guidelines and that actual waiting periods may vary. Additionally, some lenders, such as Fannie Mae and Freddie Mac, may have their own waiting periods that differ from those of government-backed mortgage programs. It is also worth noting that certain circumstances, such as a sudden drop in income or a significant increase in debt, may qualify a borrower for a shortened waiting period. It is always a good idea to consult with a lender or financial advisor to discuss your specific situation and what options may be available to you.
Chapter 13 Bankruptcy Waiting Periods
It is important to note that the waiting periods for obtaining a mortgage after filing for Chapter 13 bankruptcy may vary depending on the type of mortgage and the lender’s policies. In general, however, borrowers may have shorter waiting periods compared to those who filed for Chapter 7 bankruptcy. Here are some general guidelines for waiting periods after a Chapter 13 bankruptcy discharge:
- FHA loans: No waiting period
- VA loans: No waiting period
- USDA loans: 1 year
- Conventional loans: 4 years
Keep in mind that these are just general guidelines and that actual waiting periods may vary. It is always a good idea to consult with a lender or financial advisor to discuss your specific situation and what options may be available to you.
It is also worth noting that a Chapter 13 bankruptcy may stay on a credit record for up to seven years, although it may have less of an impact on a person’s credit score as time goes on. A Chapter 7 bankruptcy, on the other hand, may stay on a credit record for up to 10 years. Both types of bankruptcy may affect a person’s ability to obtain credit, including a mortgage, in the short term. However, rebuilding credit and making on-time payments can help improve a person’s creditworthiness over time.
What Type Of Mortgage Can You Get After Bankruptcy?
It is true that home buyers who have filed for bankruptcy may be able to apply for certain types of mortgages after the required waiting period. Here is a summary of some mainstream mortgage programs that may be available to buyers with a recent Chapter 7 or Chapter 13 bankruptcy:
- FHA Loans: These loans are backed by the Federal Housing Administration and may be available to buyers with a credit score of at least 580. They usually require a minimum down payment of 3.5% and may have the shortest waiting period for buyers coming out of bankruptcy. However, mortgage insurance is required for FHA loans.
- VA Loans: These loans are backed by the Department of Veterans Affairs and may be available to active military members, veterans, and surviving spouses. They usually require a credit score of at least 620 and do not require a down payment. They may have the shortest waiting period after bankruptcy and do not require mortgage insurance.
- USDA Loans: These loans are backed by the United States Department of Agriculture and may be available to buyers in rural areas and lower-density suburbs. They usually require a credit score of at least 580 and do not require a down payment. They may offer low interest rates and reduced mortgage insurance requirements.
- Conventional Loans – Fannie Mae: These loans are backed by the Federal National Mortgage Association (Fannie Mae) and may be available to buyers with a credit score of at least 620. They usually require a down payment of 3% and may offer subsidized mortgage rates for lower-income households. However, mortgage insurance may be required for conventional loans with less than a 20% down payment.
- Conventional Loans – Freddie Mac: These loans are backed by the Federal Home Loan Mortgage Corporation (Freddie Mac) and may have similar requirements to conventional loans backed by Fannie Mae.
How To Get Better Mortgage Rates After Bankruptcy?
It is true that bankruptcies can be common and do not necessarily prevent a person from applying for a mortgage. Lenders may treat bankruptcies as they would any other credit event and may still consider eligible buyers for mortgage approval. However, it is important to note that bankruptcy may affect a person’s access to lower mortgage rates and low-down payment loans, and it may be helpful to work on improving your credit score after bankruptcy to increase your chances of getting approved for a mortgage. Here are some steps you can take to improve your credit and get pre-approved for a mortgage after bankruptcy:
- Establish new credit: One way to establish new credit is by obtaining a secured credit card or working with a credit builder company like StellarFi. These options can help you build a positive credit history by allowing you to take on new debt and pay it off in small, manageable payments that creditors like to see.
- Keep balances low: Once you have started to take on new debt, it is important to keep your balances low. This can help demonstrate to creditors that you are able to manage debt effectively. You do not necessarily need to pay off your balances in full each month, but keeping a low running balance that you pay off on time can be beneficial.
- Pay it off on time: Making timely payments is one of the most important factors in improving your credit score. Missing payments can have a significant negative impact on your credit score, so it is important to make sure you are paying your debts on time.
- Get pre-approved: A mortgage pre-approval is a helpful step in the mortgage process as it can help you build a budget, show you mortgage rates, and check your credit score. It can also demonstrate to sellers that you are prepared and serious about making an offer on a property. Getting pre-approved can help you feel more confident and informed as you begin the process of buying a home after bankruptcy.
Bottom Line
It is possible for individuals who have filed for bankruptcy to apply for a mortgage and become homeowners in the future. However, it is important to be aware that bankruptcy may impact a person’s credit score and their ability to secure a mortgage in the short term.
Lenders may have specific waiting periods and credit score requirements for borrowers who have filed for bankruptcy, and it may be helpful for borrowers to work on rebuilding their credit and demonstrating a history of on-time payments to increase their chances of getting approved for a mortgage. It may also be helpful to consult with a lender or financial advisor to discuss your specific situation and determine which mortgage options may be available to you