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Since 2003, Dan Green has been a leading mortgage lender and respected industry authority. His unwavering commitment to first-time home buyers and home buyer education has established him as a trusted voice among his colleagues, his peers, and the media. Dan founded Homebuyer.com to expand the American Dream of Homeownership to all who want it. Read more about Dan Green.
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Roughly 1% of U.S. households file for bankruptcy each year, and many will be eligible to buy a home within 2 years of their bankruptcy discharge.
Here’s why:
Mortgage lenders know that filing for bankruptcy is sometimes necessary and that consumers aren’t always at fault. So, mortgage rules define a clear home-buying timeline so consumers with bankruptcy can stop renting and start owning.
This article discusses how to buy a home after bankruptcy. It discusses the different mortgages, how long after bankruptcy you can buy a home and the fastest ways to improve your credit score.
Experiencing bankruptcy lowers your credit rating and creates other temporary obstacles to homeownership.
For example, in the first two years after filing for bankruptcy, a home buyer cannot be mortgage-approved through one of the government’s five mortgage agencies. A two-year waiting period is required.
After two years, homeownership pathways widen.
Mortgage lenders don’t discriminate against buyers with bankruptcy. Instead, lenders are interested in the bankruptcy circumstances and how the buyer has managed credit since discharge.
On-time payment histories are required, and credit scores must be in recovery.
FHA loans require credit scores of 500 or higher, and other government-backed mortgage loans require a minimum 620 FICO score.
Lenders will also confirm that the bankruptcy gets officially discharged by court order and that no new debts got added to the filing.
Most home buyers can get approved for a mortgage 24 months after discharge from Chapter 7 bankruptcy or immediately after discharge from Chapter 13 bankruptcy.
Chapter 7 completely wipes out all debt. Chapter 13 is a reorganization of debt based on a payment schedule. Because of the way the two impact debt, each requires a different waiting period timeline.
Waiting periods for both Chapter 7 and Chapter 13 bankruptcies can be reduced for buyers with extenuating circumstances – often by half.
An extenuating circumstance is a one-time event beyond the buyer’s control that reduces income sharply or creates a catastrophic increase in debt.
Common examples of extenuating circumstances include:
Claims of extenuating circumstances require supporting documentation and a reasonable explanation for how the event caused the bankruptcy.
The waiting period to buy a home after a Chapter 7 bankruptcy ranges from two to four years—depending on your mortgage type.
From the date of discharge:
The FHA allows a 12-month waiting period for buyers with extenuating circumstances, and Fannie Mae and Freddie Mac allow a two-year waiting period.
The waiting period to buy a home after a Chapter 13 bankruptcy ranges from zero days to two years—depending on your mortgage type.
From the date of discharge:
A typical Chapter 13 bankruptcy period lasts between three and five years, depending on the amount of debt and the debtor’s annual income.
With a Chapter 13 bankruptcy, your credit isn’t affected as much as Chapter 7, which stays on a credit report for seven years.
Loan Type | Chapter 7 | Chapter 13 |
FHA loans | 2 years | None |
VA loans | 2 years | None |
USDA loans | 3 years | 1 year |
Conventional loans | 4 years | 4 years |
Home buyers can apply for any mortgage after bankruptcy. So long as the buyer meets the required waiting period and credit score minimums, the mortgage can be approved.
Here are five mainstream mortgage programs for buyers with a recent Chapter 7 or Chapter 13 bankruptcy.
Get pre-approved to see whether you qualify for these loans.
Bankruptcies are common and don’t affect a person’s ability to apply for a mortgage. Lenders treat bankruptcies like other credit events. Eligible buyers can still get mortgage-approved.
However, when buying a home after bankruptcy, you can improve your access to lower mortgage rates and low-down payment loans by raising your credit score by even a little.
Take these steps to improve your credit and get pre-approved for a mortgage.
Secured credit cards and credit builder companies like StellarFi help improve credit. These allow you to establish new credit and pay it off in small, manageable payments that creditors like the see.
Once you’ve started to take on new debt, be sure to keep your balances low. You don’t need to pay them off in full. Keeping a low running balance that you pay each month is good because it shows you can manage debt.
While maintaining new debt, the most important thing is to pay it on time. Missed payments have the most significant impact on your credit score.
A mortgage pre-approval is like a dry-run of the mortgage process. This pre-approval will prepare you for a mortgage by helping you build a budget, show you rates, and check your credit score. When it comes to buying, a pre-approval will prove to the buyer that you are prepared and serious about your offer.
You can get pre-approved with Homebuyer in just three minutes.
Yes, you can apply for a mortgage without your spouse. Your lender won’t consider the bankruptcy filing as part of the mortgage application. However, the application may not use your spouse’s income or assets to help you qualify.
Home buyers can buy a home immediately after discharge from Chapter 13 bankruptcy with an FHA-backed or VA-backed loan. A two-year wait is necessary after Chapter 7 bankruptcy.
Raising your credit score can get you better rates and access to different types of loans. However, the money you spend on rent while trying to raise your score typically won’t offset the amount you save with a higher credit score.
Although bankruptcies stop affecting credit scores after two years, they remain on credit reports for seven years following a Chapter 13 and 10 years following a Chapter 7.
You can purchase a second home after bankruptcy. Bankruptcy events are treated like other credit events and don’t prevent buyers from getting access to mortgages.
Home buyers with multiple prior bankruptcies can wait as long as five years.
Mortgage lenders reduce waiting periods after bankruptcies from extenuating circumstances. Extenuating circumstances include loss of income after a divorce, large medical bills or inability to work after injury or illness, and unexpected job joss.
See how much home you can afford to buy. Use our no-risk Immediate Mortgage Approval and find your mortgage eligibility in an instant.
What is Debt-to-Income?
Roughly 1% of U.S. households file for bankruptcy each year, and many will be eligible to buy a home within 2 years of their bankruptcy discharge. Here’s why: Mortgage lenders know that filing for bankruptcy is sometimes necessary and that consumers aren’t always at fault. So, mortgage rules define a clear home-buying timeline so consumers […]
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