Can you buy a house after bankruptcy? What you need to know

Bankruptcy is a legal process that eliminates or reorganizes certain debts – and it doesn’t have to end your homeownership goals. While a Chapter 7 can remain on your credit report for up to 10 years, a Chapter 13 about 7 years, you can still buy a home by understanding required waiting periods, choosing the right mortgage, and rebuilding your credit along the way.

Learn more about how to buy a home after bankruptcy, how long you need to wait after filing to apply for a loan, and how you can maximize your chances of success.

Can you buy a house after bankruptcy?

Yes, it is possible to buy a house after bankruptcy. The exact steps you’ll need to take depend on the type of bankruptcy you filed, the specifics of your situation, and the type of loan you’re taking out. You'll also need to find mortgage lenders that work with Chapter 7 or Chapter 13 bankruptcies.

How bankruptcy affects your mortgage eligibility

Bankruptcy affects your mortgage eligibility in several ways. Bankruptcy shows up on your credit report for 7 to 10 years and hurts your credit score.

When you're considering buying a house after bankruptcy, it's important to understand the difference between a bankruptcy discharge and a dismissal. A discharge is where a bankruptcy court eliminates your debt, which means you no longer have to pay your previous creditors. A dismissal is where the court closes your case but does not eliminate your debt.

Many lenders will view bankruptcy as a negative mark and may be unwilling to issue a mortgage to someone who's had one.

Here are some of the main challenges people who’ve experienced bankruptcy face:

• High interest rates. Even if you find a lender willing to issue a mortgage, it may come with a higher mortgage interest rate. This represents the additional risk to the lender.
• Needing more down payment. In addition to a higher interest rate, the lender may require a higher down payment.
• Stricter underwriting. Mortgage underwriting is an in-depth review of your finances to ensure you can afford a mortgage. If you’ve had a bankruptcy, the underwriter may go into even more detail.
• Investor overlays. An investor overlay is an additional requirement imposed by a lender to ensure a loan can be purchased in the secondary mortgage market.
• Skepticism from lenders. Lenders likely will want to know what caused your previous bankruptcy and what steps you've taken to ensure that it won't happen again.

How long after bankruptcy can you buy a house?

Most lenders will require some time to pass after your bankruptcy before approving you for a mortgage. This is often called seasoning. The exact waiting period after bankruptcy will depend on the lender, the type of loan you're applying for, and whether you declared Chapter 7 or 13.

Here are some of the common waiting periods:

What type of mortgage can you get after bankruptcy?

Nothing permanently excludes you from getting a specific type of loan because you’ve gone through a bankruptcy. However, your lender may have specific requirements, such as a higher down payment. As long as you meet the appropriate waiting period, you're free to apply for any loan after bankruptcy. But you can qualify for some types of mortgage loans much more easily than others.

Conventional loans

A conventional loan is issued by a private lender and not backed by the federal government. Because of that, it can sometimes be more difficult to obtain compared with government-backed loans.

• Minimum credit score required: Fannie Mae and Freddie Mac recently dropped the 620 minimum credit score requirement. Your lender still will review and evaluate your credit history and may establish its own minimum credit score requirement.
• Down payment requirements: The minimum down payment is 3%¹ for a fixed-rate loan and 5% for an adjustable-rate mortgage (ARM). You’ll need to pay for private mortgage insurance (PMI) if you put down less than 20%.

FHA loans

An FHA loan is insured by the Federal Housing Administration. It is designed to be more accessible, especially to first-time homebuyers. Because it’s backed by the federal government, it can be more forgiving than conventional mortgage loans. Your FHA loan rate will depend on your overall credit score and financial history.

• Minimum credit score required: Rocket Mortgage requires a credit score of 580, though the FHA and other lenders allow a score of 500 to 579 with 10% down.
• Down payment requirements: You need to put down 3.5% if your credit score is at least 580, and 10% if it's between 500 and 579.

VA loans

A VA loan is a mortgage available to active-duty military personnel, veterans, and their surviving spouses.

• Minimum credit score required: The VA requires no minimum credit score, though lenders may set their own minimums.
• Down payment requirements: None.

USDA

USDA loans help low- to moderate-income borrowers buy a home in specific rural areas. While Rocket Mortgage currently doesn't offer USDA loans, it's important to be aware of them in case you qualify.

• Minimum credit score required: Most lenders require a credit score of 640 or higher.
• Down payment requirements: None.

Steps to improve your chances for mortgage approval

If you’ve had a previous bankruptcy, the first thing that you’ll want to do is take steps to repair your credit:

• Pay your bills on time
• Get a secured credit card
• Keep your credit utilization ratio below 30%
• Pay down your debts
• Avoid accumulating new debts
• Keep a steady income and employment history

Depending on your situation, these steps may take months or years. This could match up with the waiting period required by many types of mortgage loans.

Writing a letter of explanation

A letter of explanation is a document that explains negative marks on your credit report. One situation in which a letter of explanation may be helpful is after a prior bankruptcy. If there were unusual or extenuating circumstances that caused your bankruptcy, a letter of explanation can improve your chances of a mortgage approval after bankruptcy.

How to apply for a mortgage after bankruptcy

Here are some common steps to follow when applying for a mortgage after bankruptcy.

1. Seek lenders familiar with post-bankruptcy loans

Some lenders work with applicants who have undergone bankruptcy. Such lenders can be great to work with, since they are already familiar with the relevant rules and guidelines.

2. Gather your documentation

Your lender will ask you for some financial documentation when you apply for a mortgage. You can get preapproved faster if you already have your documents in order before you apply.

Some documents that your lender will likely ask for include:

• Bankruptcy petition
• Discharge papers
• Income tax returns
• Recent pay stubs
• Letter of explanation

3. Get mortgage preapproval

Once you’ve gone through your waiting period, your finances are in order, and you're ready to buy, you’ll want to apply for mortgage preapproval. A preapproval is a letter from a lender that estimates how much you can borrow. Getting preapproval is important for a couple of reasons:

• A preapproval letter lets you know which homes are within your budget and helps you narrow your property search.
• A preapproval tells real estate agents and sellers that you’re likely to secure the funding you need to buy the home you want to make an offer on. This can be an especially important consideration after a bankruptcy.

4. Continue with the mortgage process

After you've been preapproved and an offer has been accepted, you'll continue through the mortgage process. During the underwriting process, stay in touch with your lender and respond promptly to any questions they may have. Timely responses can ensure you close on time.

FAQ

Here are answers to common questions about buying a house after a bankruptcy.

How long does it take to rebuild credit after bankruptcy?

If you take steps like opening a secured credit card and paying all your bills on time, you can expect it to take 18 – 24 months to rebuild your credit after bankruptcy. Those who aren’t actively working to repair their credit after bankruptcy may find that it takes longer.

Is it difficult to buy a house after bankruptcy?

It can be more challenging to buy a house with a bankruptcy on your credit history. However, there are steps you can take to increase your chances of getting approved for a mortgage after bankruptcy, such as repairing your credit, writing a letter of explanation, and saving for a down payment.

What is an extenuating circumstance?

An extenuating circumstance might be an unusual or rare occurrence that can help explain a negative item on your credit report, such as a bankruptcy. For example, you might have had significant medical bills, an extended job loss, or unusual family circumstances. If you can show that these things are unlikely to happen again, a lender may be more willing to issue you a new mortgage.

Can I qualify with a co-signer?

If you are unable to qualify for a mortgage loan on your own, you may be able to qualify with a co-signer. A co-signer agrees to be financially responsible for the loan if the primary borrower fails to make payments. Co-signers often are family members, friends, or parents.

Will I always pay a higher interest rate?

It’s important to understand the interest rate or APR that you’ll be charged on your mortgage. While you won’t necessarily pay a higher interest rate if you apply for a mortgage after bankruptcy, it is more likely that you’ll have a higher rate than someone without a previous bankruptcy on their credit report.

The bottom line: There is homeownership after bankruptcy

It’s possible to get a mortgage after a bankruptcy. However, the amount of time you need to wait after your bankruptcy is dismissed or discharged depends on the type of bankruptcy and your loan type. If your credit score is below 580, you should focus on re-establishing your credit before you apply for mortgage preapproval.

If you're ready to begin your home buying journey, speak to a Home Loan Expert today who can help you explore your borrowing options with Rocket Mortgage.

¹The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

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