Buying A House After Bankruptcy: What You Need To Know

*As of July 6, 2020, Rocket Mortgage^® is no longer accepting USDA loan applications.

Do you have a bankruptcy on your record? If so, it can feel like you’ll never be able to return to financial normalcy. However, the truth is that bankruptcy isn’t a permanent black mark on your credit report. It’s even possible to buy a home after bankruptcy if you know which steps to take.

In this article, we’ll take a closer look at how to buy a home after bankruptcy. We’ll also show you how long you need to wait after filing to apply for a loan, and how you can maximize your chances of success.

As mentioned, it’s possible to buy a house after bankruptcy. However, the exact steps you’ll need to take depends on the type of bankruptcy you filed, the specifics of your unique situation and the type of loan you’re taking out. Let’s take a closer look at some of the nuances surrounding buying a house after bankruptcy.

Before you can get a loan, you’ll need to wait until a judge discharges your bankruptcy – or dismisses it if the bankruptcy doesn’t meet requirements. But exactly how long do you need to wait? Let’s break it down and look at how each type of bankruptcy affects your mortgage.

Buying A House After Chapter 7 Bankruptcy

The most common type of bankruptcy is Chapter 7 bankruptcy. During a Chapter 7 bankruptcy, a court wipes away your qualifying debts. Unfortunately, your credit will also take a major hit.

Waiting Periods For Conventional Loans

If you’ve gone through a Chapter 7 bankruptcy, you’ll need to wait at least 4 years after a court discharges or dismisses your bankruptcy to qualify for a conventional loan. Typically, this mandatory waiting period will give individuals sufficient time to rebuild their credit and provide enough evidence to lenders that they are a responsible borrower that is ready to take on a mortgage. While it can be frustrating to endure this waiting period, it’s important to do all you can to sort your finances so that you’re ready to buy a house when the time is up. 

Waiting Periods For Government-Backed Loans

Government-backed mortgage loans are a bit more lenient. You need to wait 3 years after your bankruptcy’s dismissal or discharge to get a United States Department of Agriculture (USDA) loan. To qualify for a Federal Housing Administration (FHA) or U.S. Department of Veterans Affairs (VA) loan, you only need to wait 2 years after your discharge or dismissal.

Buying A House After Chapter 13 Bankruptcy

A Chapter 13 bankruptcy is less serious than a Chapter 7. Instead of wiping away debt, Chapter 13 involves a reorganization of your debts. This means you may need to make scheduled payments to your creditors. Chapter 13 bankruptcy also doesn’t have as large of an effect on your credit score – and you can keep your assets.

Waiting Periods For Conventional Loans

The amount of time you need to wait to apply for a conventional loan after a Chapter 13 bankruptcy depends on how a court chooses to handle your bankruptcy. If the court dismisses your bankruptcy, you must wait at least 4 years from your dismissal date before you can apply. If a court discharges your bankruptcy, the waiting period for post-bankruptcy borrowers to apply for a conventional mortgage that meets Fannie Mae or Freddie Mac requirements is 4 years from the date you filed and 2 years from your dismissal date.

Waiting Periods For Government-Backed Loans

Like a Chapter 7 bankruptcy, standards are a bit more relaxed for government-backed loans. USDA loans require a 1-year waiting period after a Chapter 13 bankruptcy. This waiting period is the same whether you get a discharge or dismissal. FHA and VA loans simply require a court to dismiss or discharge your loan before you apply.

No rules are in place that permanently exclude you from getting a certain type of loan because you’ve gone through a bankruptcy. As long as you meet the appropriate waiting period discussed above, you’re free to apply for any type of loan after a bankruptcy. But you can qualify for some types of mortgage loans much easier than others.

FHA Loans After Bankruptcy

One type of mortgage that is popular with those who have filed for bankruptcy is an FHA loan. FHA loan waiting periods are shorter than other types of home loans. If you have a Chapter 13 bankruptcy, there’s no waiting period at all after a court dismisses or discharges your bankruptcy.

One of the major benefits of getting an FHA loan after a bankruptcy is its lower credit requirements. Even after a court dismisses or discharges your bankruptcy, your bankruptcy filing will still negatively influence your credit score. A Chapter 7 bankruptcy will stay on your credit report for 10 years, while a Chapter 13 bankruptcy will stick around on your credit history for 7 years.

Credit Requirements

During this time, your credit score will be much lower than before your bankruptcy. But with an FHA loan, you can buy a home with a credit score as low as 580 points. You may even qualify for a loan with a score as low as 500 points if you have a down payment of at least 10%. However, at Rocket Mortgage^®, the minimum credit score is 580.

Now, let’s take a look at the specific steps you’ll follow when you apply for your loan.

Step 1: Repair Your Credit

A bankruptcy on your credit report lowers your credit score. If your score is 580 points or lower, you’ll need to take some time to repair your credit so you can meet your mortgage lender’s minimum credit score requirements.

Here are some basic steps you can take to begin rebuilding your credit:

Re-Establish Your Credit

One way to get started re-establishing your credit after Chapter 7 or 13 bankruptcy is to get a secured credit card. When you open a secured credit card, you put a deposit down with your credit card company.

This deposit becomes your line of credit. From there, you make payments on your account and pay off your debt each month. You can get a secured credit card with a low credit score, even after a bankruptcy.

Pay Down Your Debt

Focus any extra cash you have toward paying down debt after your bankruptcy closes. This shows creditors that you’re serious about making a change in your financial situation and raising your credit score over time. Lower levels of debt can also help you qualify for a mortgage.

Pay All Your Bills On Time

The most important thing to do to raise your credit score is to make your credit card and loan payments on schedule each month. Consider signing up for auto-pay if you have trouble managing your payment due dates. Most credit card and loan companies have an auto-pay feature that automatically deducts your minimum payment on the day it’s due.

Step 2: Write A Bankruptcy Explanation Letter

Every time a lender issues a mortgage, they assume a risk. So when you apply for a loan, your lender will take a careful look at your finances to be sure you’ll make your mortgage payments on time every month.

Of course, a bankruptcy on your financial record is a major red flag. You can increase your chances of getting a mortgage after bankruptcy by writing a letter of explanation. A letter of explanation tells your lender more details about your bankruptcy and why you needed to declare bankruptcy.

Include details on the circumstances that led to your filing and how your financial life has changed since then. Also, you’ll want to explain the steps you’ve taken to prevent a future bankruptcy as well – like paying off debt and building an emergency fund.

A letter of explanation isn’t always a requirement to get a mortgage after bankruptcy, but it can help your lender see the bigger picture instead of just a set of numbers. Include your explanation letter with your mortgage application when you request a preapproval.

Step 3: Get Preapproved

Once you’ve gone through your waiting period and your finances are in order, it’s time to apply for a mortgage preapproval. A preapproval is a letter from a lender that tells you about how much money you can get in a mortgage loan. Getting preapproved is important for a couple reasons:

• First, a preapproval letter lets you know which homes are in your budget and allows you to narrow your property search.
• Second, a preapproval tells real estate agents and sellers that you’re more likely to be able 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.

Provide Financial Documentation

Your lender will ask you for some financial documentation when you apply for a preapproval. 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 your most recent:

• W-2s
• Bank statements
• Pay stubs

Keep in mind that preapproval and prequalification aren’t the same. Prequalifications usually don’t require asset verification. This means that they often hold less weight than a preapproval. Make sure you get preapproved – not prequalified.

Step 4: Respond To Lender Inquiries

Once you submit your mortgage application, the rest is in your lender’s hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If meet the lender’s requirements based on these factors, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.

Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lender’s inquiries quickly to improve your chances of approval.

Below are some frequently asked questions about bankruptcy and mortgages to help you get a better understanding of what you should know.

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. 

How long after Chapter 7 can I get an FHA loan?

There’s a 2-year waiting period before you can apply for an FHA loan after your bankruptcy’s discharge or dismissal.

Is it hard to get a house after bankruptcy?

It can be more difficult to get a house after bankruptcy than for those who don’t have a bankruptcy in their 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.

It’s entirely 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.

Let’s say you filed for Chapter 7 bankruptcy. You’ll need to wait 2 – 4 years depending on your loan type. For a Chapter 13 bankruptcy, you may be able to apply immediately or you may need to wait up to 4 years. FHA loans are a great option after bankruptcy because they allow you to buy a home with a lower credit score.

If your credit score is below 580 points, you may want to focus on reestablishing your credit before you apply for preapproval.

Once your credit score improves, write a letter of explanation that details your bankruptcy. You can apply for a loan preapproval after your waiting period expires. Have your financial documentation in order and respond to lender inquiries as fast as possible for the best shot at approval.

Have you completed your waiting period after a bankruptcy? Do you feel ready to begin your home buying journey? Get started and apply for a mortgage with Rocket Mortgage^® today!