Can you buy a house after bankruptcy?

Wondering if you can buy a house after bankruptcy is a question you may encounter in the home-buying process. Pursuing bankruptcy is a major financial step that will hurt your credit. When your credit suffers, it can be more challenging to qualify for financing. Which begs the question: Can you buy a house after bankruptcy?

Learn if and when you can purchase a home after a Chapter 7 or Chapter 13 bankruptcy, how long you may have to wait to be eligible for a mortgage loan, why these limits are in place, the step you’ll need to take after bankruptcy, and more.

Can you buy a house after bankruptcy?

The good news is that even if you declare bankruptcy, you can purchase a home in the future. You will just have to wait a minimum amount of time before you can qualify for home financing.

If you are purchasing a home entirely with cash, however, there is no waiting period following bankruptcy.

“If you rebuild your credit and avoid new debt, you can buy a home within one to four years after declaring bankruptcy,” says Levon Galstyan, an experienced certified public accountant in Glendale, California. “But a bankruptcy makes it harder to borrow money because it hurts your credit history and shows that you had trouble paying back loans in the past.”

Loan rules on buying a house after bankruptcy

Buying a home after bankruptcy comes with some rules. The standard waiting period to apply for a mortgage after a bankruptcy discharge date will vary depending on the type of loan you want to apply for and the type of bankruptcy you declared.

Chapter 7 bankruptcy rules

Chapter 7 is the most common type of bankruptcy.

“With a Chapter 7, the court writes off all of your qualifying debts. But this also severely damages your credit,” cautions Lyle Solomon, a financial expert and consumer finance attorney with Oak View Law Group. “After they discharge or dismiss your Chapter 7 bankruptcy, you have to wait to apply for a loan.”

Specifically, here are the waiting periods following a Chapter 7 bankruptcy, according to Solomon:

• Conventional loan – 4 years from the date your bankruptcy was dismissed or discharged (2 years if you can provide documents proving that extenuating circumstances caused your bankruptcy)
• FHA loan – 2 years (1 year for extenuating circumstances)
• VA loan – 2 years (less if the bankruptcy was caused by business failure, you find permanent employment afterward, and there are no credit issues on your account)
• USDA loan – 3 years (less for extenuating circumstances)
• Jumbo/portfolio/subprime loan – no waiting period

Chapter 13 bankruptcy rules

In a Chapter 13 bankruptcy, you are allowed to make payments to some or all of your creditors over a three- to five-year period.

"Once these payments are made, your remaining debt is discharged but is reported to the three major credit bureaus for seven years,” notes Galstyan.

Solomon says the waiting periods before you can apply for a mortgage loan after a Chapter 13 bankruptcy are:

• Conventional loan – 2 years (4 years if your bankruptcy was caused by financial mismanagement and your case was dismissed)
• FHA loan – 1 year (you also need to obtain written permission from the court)
• VA loan – 1 year (from the start of your Chapter 13 debt repayment plan)
• USDA loan – 1 year (if you have not missed any payments; 3 years if your debt was discharged and you did not complete your repayment plan)
• Jumbo/portfolio/subprime loan – no waiting period

Why are these bankruptcy rules in place?

These minimum waiting periods were put into effect for very important reasons.

“These are essentially risk mitigation solutions for lenders. The rules are also there to allow time for you to reestablish credit and prove that you are ready for the responsibility of taking on a mortgage loan,” says Eric Jeanette, owner of FHA Lenders, a site that provides helpful information on FHA loans.

Consider that your credit score decreases after a bankruptcy.

“Your score can fall well below 580, which is the minimum for an FHA mortgage. Other types of loans require a minimum score of 640,” Galstyan points out. “A higher credit score increases a lender’s confidence in your ability to make timely payments and may help you qualify for lower mortgage interest rates and fees. So it’s actually in your best interest to wait a while after bankruptcy before purchasing a home so that you can rebuild your credit and increase your credit score.”

Lenders are not trying to punish you for filing bankruptcy in the past by requiring these waiting periods.

“They want to know that you are now in a better position and are a better risk as a borrower,” Solomon continues.

What to do after bankruptcy?

During your post-bankruptcy waiting period, there are essential steps you can take to rebuild your credit, up your credit score and increase your chances of getting a mortgage loan in the future.

“Repairing your credit should be your first consideration. Your credit score and credit report should indicate that you’ve managed your finances well after bankruptcy,” says Solomon. “You can bring your credit score back up if you consistently pay your monthly bills on time, pay off your demanding debts, and do not borrow any more money or open new accounts. If you need a credit card and want to improve your score, you can apply for a secured credit card in which you deposit money in an account that serves as your credit card limit. You can also pursue help from a credit repair company.”

Others recommend budgeting carefully, too.

“Control your monthly household budget by calculating your monthly income and expenses to see what you have room for and what you don’t,” Galstyan advises. “Get copies of your three free credit reports, as well, and scrutinize them so you can see what needs to be improved.”

If you notice any inaccuracies or errors on your credit reports, address them promptly with Experian, TransUnion and Equifax.

Over this waiting interval, aim to also save up for the needed down payment. Experts recommend trying to salt away at least a 20% down payment to avoid having to pay mortgage insurance and to earn equity more quickly.

Steps to purchase a home after bankruptcy

Jeanette notes that you can actually begin working with a lender in the months and weeks before your waiting period has elapsed.

“During this time, you can work on cleaning up outstanding credit issues, identify cash to close shortfalls, and establish an estimated preapproval loan amount,” says Jeanette.

Be aware that your next mortgage lender may request a letter of explanation to better understand what caused your bankruptcy and whether the situation has improved enough.

“In crafting this letter, you’ll need to establish that the situation was out of your control but it has now substantially improved. If you can demonstrate to the creditor that your finances are now in great shape via an improved credit score, greater cash reserves, and a lower debt-to-income ratio, you can increase your chances of getting approved for a mortgage loan,” adds Solomon.

Despite having a bankruptcy on your record, the actual process of applying for a mortgage loan may not be that much different than if you had not declared bankruptcy. Just be prepared for more paperwork and the process to take longer.

What to expect when buying a home post-bankruptcy

Truth is, even after your waiting period has passed, you may find it more challenging to obtain a mortgage loan than if you had not declared bankruptcy. You may also have to pay a higher interest rate as well.

“After filing for Chapter 7 or Chapter 13 bankruptcy, realize that this mark can remain on your credit reports for up to 10 years. And because bankruptcy filings are a matter of public record, anyone can search for them,” Galstyan cautions. “When you begin to apply for a mortgage after bankruptcy, expect your lender to likely ask you a few questions about the bankruptcy.”

The bottom line on buying a house after bankruptcy

Getting financing to purchase a home following bankruptcy is more difficult but not impossible. By following recommended strategies and remaining financially responsible during your waiting period, you can position yourself as a more creditworthy borrower candidate.

“When it’s time to apply for a mortgage loan, be honest and open with the lender about your past and present finances and make yourself accessible and responsive. This will quicken your application process and reflect favorably on you as your application is reviewed,” says Galstyan.

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