How to Buy a House After Bankruptcy

You can buy a house even following a bankruptcy — but not immediately. While a bankruptcy will affect the process and may make it more difficult to get approved by a mortgage lender, it doesn't block you from qualifying for a mortgage permanently.

You'll need to go through a waiting period post-bankruptcy, which ranges from one to four years depending on the mortgage and bankruptcy type. This is a pivotal time for financial recovery and credit improvement.

With effective financial planning and enough time to rebuild your credit, you can secure a mortgage. Over time, the adverse effects of bankruptcy diminish if you maintain good financial practices post-discharge. Knowing how different bankruptcies impact home buying will allow you to strategically plan for homeownership after bankruptcy.

The road to homeownership after bankruptcy entails a waiting period ranging from one to four years based on your desired mortgage type and chapter of bankruptcy. This phase starts when your bankruptcy concludes, offering a chance to rebuild your financial base.

For Chapter 7 Bankruptcy filers, the waiting period ranges from two to four years depending on the mortgage type. Conventional loans require a four-year wait, while you may qualify for FHA and VA loans after only two years. Chapter 13 Bankruptcy filers benefit from potentially shorter waiting periods post-repayment completion, generally one to two years, highlighting the more lenient approach for those who have successfully adhered to a repayment plan.

The waiting periods extend for individuals with multiple bankruptcies, who are typically required to wait three to five years before applying for a mortgage to demonstrate a period of financial stability. Waiting periods ensure that applicants are well-prepared and positioned for success when seeking mortgage approval following a bankruptcy.

Here’s a table summarizing the waiting periods according to mortgage type and chapter of bankruptcy filed:

The gap between when you end your bankruptcy and apply for a mortgage influences how lenders see you; a longer gap usually means less risk as you've had more time to rebuild your finances and credit.

Proving that you can reliably pay back debts after you've filed for bankruptcy is important as bankruptcy can drop a good credit score by up to 200 points.

During the waiting period, you'll need to work on rebuilding your credit to a point where you can qualify for a mortgage. The higher your score, the better your chances of getting approved and being offered favorable loan terms. Required credit scores for various loan types are as follows:

• Conventional Loans: Minimum 620
• FHA Loans: Minimum 580 for the 3.5% down payment option; 500-579 for a 10% down payment
• VA Loans: No set minimum by the VA, but lenders typically require a minimum of 620
• USDA Loans: Minimum 640 for automatic processing, lower scores may be considered with manual underwriting

This process of credit restoration requires a strategic plan, patience and focused efforts to navigate back to financial health. Start with these proactive steps:

Once you've navigated the required waiting period and your credit score begins to meet lender requirements, you're in a position to consider any mortgage type. When choosing a mortgage post-bankruptcy, evaluate both initial qualification criteria and long-term impacts.

FHA and USDA loans offer lower down payments and flexible credit criteria but include extra costs like mortgage insurance. Conventional and VA loans, despite their tougher requirements, may lead to lower overall expenses for eligible borrowers. Your mortgage choice should match your financial situation, homeownership goals and the progress you've made in rebuilding your financial health post-bankruptcy.

Here’s a summary of the pros and cons of each mortgage type to help you make an informed decision:

Typically sought after for their favorable terms, conventional loans are not backed by a government entity but conform to guidelines set by Fannie Mae and Freddie Mac. They're ideal for borrowers with stronger credit histories.

Backed by the Federal Housing Administration, FHA loans are designed to assist those with lower credit scores and smaller down payments.

Supported by the Department of Veterans Affairs, VA loans are exclusively for veterans, active-duty service members and some military spouses.

The U.S. Department of Agriculture offers USDA loans for rural and suburban buyers, focusing on homes in designated areas.

To adequately prepare for the mortgage application process, you should make sure to understand the steps involved and gather all required documentation to enhance your chances of approval. Below is a detailed guide to navigating this process:

Applying for a mortgage following a bankruptcy involves several steps:

Gather all necessary documents to make the process smoother. Here’s what you need to prepare:

MoneyGeek has compiled a list of valuable sites and organizations offering guidance, tools and support to help you navigate the path to homeownership following a bankruptcy.

• AnnualCreditReport.com: Official site to obtain free annual credit reports from the three major credit bureaus, crucial for monitoring your credit recovery.
• Consumer Financial Protection Bureau (CFPB): Offers extensive information on mortgage options, financial literacy and consumer rights to make informed financial decisions.
• National Foundation for Credit Counseling (NFCC): A nonprofit organization providing credit counseling services, debt management plans and financial education to help improve your financial situation.
• U.S. Department of Housing and Urban Development (HUD): Provides resources on buying a home, including lists of HUD-approved housing counselors who can offer personalized advice and guidance.
• MyFICO: Provides detailed explanations on FICO scores, the credit scoring system most commonly used by lenders, and offers tools for tracking and improving your credit score.
• USA.gov Housing Help: A portal for various housing-related resources, including buying a home, rental assistance and affordable legal aid, aimed at helping individuals find the support they need.
• Making Home Affordable (MHA): An official government program providing valuable information and resources for homeowners facing financial difficulties, including those recovering from bankruptcy.