If you’ve ever gone through a bankruptcy, you know how emotionally difficult it can be. There are also ongoing financial repercussions, including effects on your credit score and report. Yes, you reduce or eliminate debts, but the tradeoff for this is that your ability to get credit in the future is impacted.
With that being said, it is possible to buy a home after bankruptcy, but it’s going to take some planning and preparation, as well as quite a bit of patience.
How Long Until You Can Buy a Home?
One big question a lot of people have is how long after bankruptcy can they buy a home?
If you want to get a mortgage, your bankruptcy has to be discharged. A discharge means that a court has released you from any liability on certain debts. A discharge also prevents creditors from trying to collect on the debts that have been discharged.
A discharge of debts is one component of bankruptcy, and it doesn’t mean your bankruptcy process is over, but it is something lenders will want to see before you buy a new home. A bankruptcy case is usually closed pretty soon after the discharge.
What Does Your Credit Report Look Like?
After bankruptcy, you’ll want to monitor your credit report. Bankruptcy filings may stay on your credit report for as long as ten years, but there’s a misconception that you have to wait that long before you can get a new mortgage, which isn’t the case.
You want to make sure your credit report is accurate, and if you’re thinking about applying for a mortgage, make sure you’re monitoring for any debts that have been discharged or repaid.
Along with ensuring there’s no outdated or wrong information, focus on rebuilding your credit after a bankruptcy. If you want to qualify for a mortgage after a bankruptcy, you have to show lenders you’re ready and you’re not too much of a risk.
Right after your bankruptcy, you might have limited credit available to you. Start rebuilding with something like a secured credit card or a small installment loan.
You need to make your payments on-time and in full each month.
If you’re wondering how long the bankruptcy itself affects your credit, it can depend. A chapter 7 bankruptcy will usually stay on your report for up to 10 years after you file.
A chapter 13 bankruptcy tends to have less stigma in the lender's eyes because you make payments under a court-approved program. After seven years, a chapter 13 bankruptcy should be taken off your credit report.
Even if the bankruptcy is still on your report, the importance should gradually diminish as you rebuild your credit in other areas.
How Long Should You Wait?
There’s not necessarily a set amount of time you should wait to apply for a mortgage after a bankruptcy, but a good rule of thumb is a minimum of two years.
There are a few reasons for this. Two years gives you time to rebuild your credit in a pretty meaningful way. This means you’re not just more likely to qualify for a mortgage but also get better terms.
Even a small change in your interest rate can have a big effect on your monthly payments and how much you pay over the life of your loan.
Government-Backed Loans
If you faced bankruptcy at one point and you don’t have a lot of money to put toward a down payment, you may have the option of an FHA or VA loan.
FHA loans are geared toward buyers who are purchasing their first home or don’t have great credit. The FHA doesn’t make the loans, but they guarantee loans made by private lenders, reducing the lender's risk.
There is a waiting period.
The FHA will consider you for a mortgage two years after a chapter 7 discharge, but you need to meet certain credit requirements. For a chapter 13 discharge, the FHA might guarantee a loan a year after your filing if you made your bankruptcy payments on time.
You’ll have to get permission from the court to take on new debt if you buy a home while you’re in chapter 13.
The Department of Veteran’s Affairs backs VA loans. They’re available to certain veterans and service members as well as some spouses. VA loans require a two-year waiting period after a chapter 7 discharge, and you’ll need to meet minimum credit score requirements.
Finally, if you’re thinking about a conventional loan, you might have to wait anywhere from 24 to 48 months to qualify following a chapter 7 bankruptcy. With a chapter 13 bankruptcy, most lenders will make you wait 24 months after discharge.
