Buying a House After Bankruptcy: What You Should Be Prepared For
Written by Jason Nelson on July 6, 2016
Declaring bankruptcy isn’t an easy decision. Yet many homeowners who can no longer meet their financial obligations are “forced” into filing for bankruptcy protection.
One of the biggest misconceptions is that the people who declare bankruptcy are unable to obtain credit for at least 10 years. While bankruptcy filings may remain on credit reports up to 10 years, most borrowers receive credit soon after the date of discharge.
Understanding Financing Options after Bankruptcy
The reason why people file for bankruptcy is to reduce or get rid of debt. On the downside, a bankruptcy appearing on the credit report will damage the credit rating, possibly ruining the chance of buying a home with the help of a mortgage in the near future.
How soon a person can qualify for a new home loan after bankruptcy depends on:
- The type of bankruptcy – With a Chapter 7 bankruptcy, the filer walks away from most of his debt, which is distributed to his creditors. The person will have to start living on cash, rather than on credit, and is allowed to apply for new credit after a minimum period of 2 years from the bankruptcy discharge date (not filing date). In case of a Chapter 13 bankruptcy, the person gets a chance to consolidate and pay off some of his debt based on a repayment plan over a period of 3 to 5 years. He may be able to get a new loan after at least 1 year from the discharge date.
- When exactly the bankruptcy is discharged – A bankruptcy discharge, or settlement, is an order from the court that releases the debtor from the liability for all or a portion of his debts and prohibits any form of collection actions on discharged debt.
- When the person rebuilds his credit score – Lenders routinely review credit reports before approving mortgage applications. Since financing options are somewhat limited after filing for bankruptcy, rebuilding the credit score as soon as possible is very important for someone thinking of buying a house after bankruptcy.
The financing options available for the borrowers interested in buying a house after bankruptcy include:
- FHA home loans – Qualifying for an FHA home loan after bankruptcy is generally easier than buying a home with a conventional mortgage. That’s because FHA loans come with more lenient terms and conditions, such as:
- shorter waiting periods – Usually, a 2-year waiting period is required for a Chapter 7 bankruptcy. A borrower who has been making constant monthly payments on Chapter 13 bankruptcy for at least 1 year can get a new FHA loan via the “Back to Work – Extenuating Circumstances” program if he has satisfactory credit and employment history, is able to document the extenuating circumstances, and meets all the other eligibility requirements;
- more flexibility regarding extenuating circumstances;
- lower credit scores (a credit score of 500 with a 10-percent down payment or above 580 with a down payment of 3.5 percent).
- VA loans – Bankruptcy can make it more difficult to qualify for this type of loan. Some of the eligibility requirements for buying a house after bankruptcy with a VA loan include:
- a 2-year waiting period after the discharge date of the Chapter 7 bankruptcy;
- a 12-month waiting period from the filing date of the Chapter 13 bankruptcy, as long as the borrower has a good credit score and no late payments, and obtains permission from the bankruptcy trustee;
- a credit score of at least 620.
- Conventional mortgages – For the traditional mortgages conforming to the guidelines established by Fannie Mae, a borrower must wait 2 years (instead of the previous mandatory waiting period of 4 years) after the actual discharge date before applying for a conventional home loan. For any other traditional mortgage, the person might need to wait 4 years after the discharge date of the Chapter 7 bankruptcy and 2 years for the Chapter 13 bankruptcy. If a Chapter 13 bankruptcy gets dismissed, the waiting period is 4 years from the date of the dismissal.
To find out which loan program best suits your needs, give us a call today at (904)-389-4635. Not only will our experienced mortgage originators explore all the financing options available for buying a house after bankruptcy; they’ll also offer you a custom quote and tailor your mortgage to your particular financial situation for a truly successful homeownership experience.