Eliminating debt by filing a bankruptcy case can make it easier for you to afford a home purchase, but it will also impact your ability to get a loan. Even so, there’s a good chance you’ll qualify for a mortgage loan sooner that you think.
There aren’t any laws that would prevent you from buying a house after the bankruptcy case is over. That doesn’t mean you’ll be able to qualify for a loan the day after your bankruptcy discharge, however. Most lenders won’t be willing to immediately take a chance on you.
What will likely slow down your purchase are the government program policies that restrict loan approval for a period after bankruptcy (more below). Private lenders also have criteria for qualifying borrowers, as well.
If you don’t have a substantial amount of money to use for a down payment, you’re likely to choose either an FHA or VA loan.
The Federal Housing Administration (FHA) is part of the Department of Housing and Urban Development (HUD) and specializes in providing opportunities to first-time homebuyers and buyers with less than perfect credit. FHA does not make the loans itself; rather it guarantees loans made by private lenders. In addition to the waiting period, you may still have to meet the lender’s minimum credit score to qualify for the loan.
Chapter 7 bankruptcy. FHA will consider you for a mortgage two years after your Chapter 7 discharge date. You will have to show a positive credit history during that two-year period, with no major credit blemishes. But having no real credit history will not necessarily knock you out of the running. Also, if you can show the FHA that the conditions leading to your bankruptcy were out of your control, like the death of a spouse, natural catastrophe, or severe medical issues, FHA will reduce the waiting period to 12 months. You will have to provide documentation demonstrating that you’ll be able to make the payments on the new mortgage.
Chapter 13 bankruptcy. FHA will guarantee a mortgage loan as soon as 12 months after you file your Chapter 13 case if you’ve made your Chapter 13 payments on time, and you can show that you can afford the mortgage payments. If you plan to purchase a home while you’re in a Chapter 13 case, you will also have to get permission from the bankruptcy court to take on new debt.
Military veterans find the mortgage lending program offered through the Department of Veteran’s Affairs attractive—primarily because a down payment isn’t required. VA mortgage loans require a two-year waiting period after a Chapter 7 discharge. During the waiting period, you’ll need to keep your credit clean because most lenders participating in the VA program will require a minimum credit score. (Members of the military and disabled veterans should also be aware of some special bankruptcy rules).
Conventional loans—those made by banks and mortgage companies without government backing—are often sold to the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Fannie Mae and Freddie Mac set borrower guidelines for the mortgages they’re willing to purchase. Although it’s possible that a lender might be more lenient in its qualification criteria, most private lenders will respect the guidelines to make their mortgages sellable. Here are the waiting periods after bankruptcy.
Chapter 7: If the bankruptcy were due to your financial mismanagement, you'd have to wait 48 months, but if the bankruptcy were out of your control, you'd be eligible after 24 months.
Chapter 13: You must wait 24 months after discharge. If the court dismisses your case without a discharge, the waiting period will increase to 48 months. If, however, you can show that you filed the case under extenuating circumstances, you’ll only have to wait 24 months.
Multiple cases: If you’ve filed more than one bankruptcy in the last seven years, it will be five years before you’re eligible, or three years if you can show extenuating circumstances. But this is still shorter than the seven years Fannie Mae requires after a foreclosure.
Also, keep in mind that Fannie Mae expects you to work toward rebuilding your credit during the waiting period.
A Chapter 7 bankruptcy can stay on your credit report for up to ten years from the filing date. A Chapter 13 bankruptcy can carry less of a stigma because debtors (people who file a bankruptcy case) make payments to creditors under a court-approved plan. The credit bureaus will delete a Chapter 13 case from your record seven years after the filing date, which can be just two years after you receive a discharge. The impact of the bankruptcy on your credit score will diminish with time.