Buying a home after bankruptcy may seem like an impossible feat, but it’s actually not out of the question. Even if you have a Chapter 7 or Chapter 13 bankruptcy on your credit report, you can still buy a home after a certain period of time. The exact length depends on several factors, including the type of bankruptcy and the type of home loan you’d like to get. Since lenders heavily weigh your credit score when evaluating your loan application, you’ll also need to re-establish that number after it’s been lowered by a bankruptcy. But you don’t need to be overwhelmed by this process. With a little patience and the right knowledge, you’ll get back into a home you can call your own even with a bankruptcy in your past.
What types of home loan can you get after bankruptcy?
The process for buying a home after Chapter 7 bankruptcy, or even Chapter 13 bankruptcy, depends on what type of loan you apply for. Each one has a different “seasoning” period, which determines how long you have to wait until you qualify again. Of course, you also have to meet the lender’s other basic mortgage requirements, so it’s important to know those as well. Here are three of the most common mortgage products available today, and how each one treats buyers with a bankruptcy in their past.
An FHA loan is backed by the federal government and offers the chance to purchase a home to home buyers who have less than perfect credit. So how long after bankruptcy can you buy a house with this type of loan? The amount of time you have to wait to qualify depends on what type bankruptcy you filed. For a Chapter 7 bankruptcy, you must wait a period of at least two years from the date the action was discharged (not filed). Some lenders might require a longer period, but two years is the legal minimum.
The waiting period for a Chapter 13 bankruptcy is a bit more complicated. You’re technically allowed to apply for an FHA loan while still paying on this type of bankruptcy, as long as your payments are verified and have been consistently paid for at least a year. You’ll also need a court trustee’s written approval and a written explanation of the bankruptcy included in your loan application.
In addition to meeting the seasoning period for your type of bankruptcy, you must also meet the basic requirements of an FHA loan. You can purchase a home with as little as a 3.5% down payment if your credit score is 580 or higher. If your score is 579 or lower, you must pay 10% of the home’s purchase price as your down payment. You do have to pay a mortgage insurance premium if you have less than 20% equity in the home, which is rolled into your monthly payments. The annual premium you pay ranges from 0.45% to 0.85% of the loan amount and depends on the amount of equity and the length of your mortgage term.
VA loans are offered to active members of the military and veterans. They include a number of benefits including no down payment and competitive interest rates. Luckily, you can still apply for a VA loan even after a bankruptcy. The waiting period is the same as an FHA loan: a minimum of two years from the discharge date.
Keep in mind that you still have qualify for all the other aspects of the loan. Most lenders require a credit score of at least 620 and a debt to income ratio of no more than 41%. You’ll also need to obtain a Certificate of Eligibility that proves your military status. There is no mortgage insurance attached to a VA loan, but most borrowers do have to pay a funding fee based on your down payment amount and the number of times you’ve used a VA loan. Also remember that not all lenders finance VA loans, so make sure you work with one who has specific experience in this niche since there are some rigorous guidelines involved.
Conventional loans have some of the strictest underwriting standards and they become even stricter when there’s a bankruptcy involved. The waiting period is four years from the discharge date of a Chapter 7 bankruptcy. For a Chapter 13, it’s two years after the discharge date, unless it was dismissed without a discharge, in which case you’ll have to wait a full four years.
You’ll need to use that time to work on rebuilding your credit and saving up your cash in order to qualify for a conventional loan because most lenders require a 640 credit score and a large down payment. You might be able to qualify with a lower credit score if you can put down a larger amount of money. It’s always best to call several lenders to compare eligibility requirements and interest rate offers.
How does bankruptcy affect your credit score?
Even if you’ve waited the appropriate seasoning period to apply for a home loan, you still need to repair your credit in order to qualify. Whether you’re applying for an FHA loan, a VA loan, or a conventional loan, you’ll most likely need your score to be somewhere between a 580 and 640. On the plus side, a Chapter 7 filing automatically wipes out your debt, so your “amounts owed” category can rebound pretty quickly. This also helps your debt to income ratio when it comes time to apply for a loan.
But a bankruptcy can cause your credit score to drop as much as 240 points, and it takes time to bring it back up. How long? A Chapter 7 filing remains on your credit report for ten years while a Chapter 13 stays there for seven years. There are a few things you can do right away to begin repairing your credit score. The first is to pay all of your bills on time each month so that you can rebuild your payment history. You should also keep your oldest credit accounts active, even if you don’t use them. The length of your credit history accounts for 15% of your score, so this is a simple way to refrain from losing any more points. Buying a house after bankruptcy is by no means unattainable, it just takes patience and diligence to rebuild your credit score while waiting out the seasoning period.
Can you buy a house even after a foreclosure?
Purchasing a home after a foreclosure is a bit trickier than a bankruptcy, because you’ve shown poor ability to repay on the exact product you’re hoping to purchase again. But nothing is impossible, you’ll just have to wait a little bit longer than you would with a straightforward bankruptcy. Here’s how it works.
If you’re seeking a conventional loan, you can expect a seven year wait period from the actual date the foreclosure was filed (it stays on your credit report for the same amount of time). FHA loans only require a three-year wait period. However, if you can prove that the foreclosure was caused by a situation out of your control, you might be able to shorten the seasoning period for both types of loan. Examples of this include a substantial period of unemployment, a major illness, or a divorce. To shorten a conventional loan wait time from ten years to three years, you’ll also need at least a 10% down payment or 90% loan to value ratio.
What if you had both a bankruptcy and a foreclosure?
You can still get a mortgage even after having both a bankruptcy and a foreclosure, you just need to clarify at which point each seasoning period begins. This can be a little tricky since some of the factors in both cases overlap with one another. Really, different lenders can view things in different ways, but generally speaking, the seasoning date should begin when you are no longer responsible for the debt. So if your foreclosure was discharged with a Chapter 7 bankruptcy and you’re looking for an FHA loan, your seasoning period would last for two years following the discharge of the bankruptcy, not from the date of the foreclosure. It’s always best to review your personal credit report with your lender to ensure you’re interpreting it correctly.
Going through a bankruptcy or foreclosure might seem like a huge block in the road, but it’s not one that is insurmountable. You still have the opportunity to purchase your own home after just a bit of waiting and working. Review your personal situation to determine which type of mortgage would be best for you and how long you have to wait before you can apply for one. Then take diligent steps to repair your credit to ensure your application is approved and you get the best interest rates available.
If you feel more comfortable getting professional help in repairing your credit, contact our partner Lexington Law. They may be able to help you remove negative items like a bankruptcy or foreclosure on your credit report. Let Lexington Law deal with creditors and credit bureaus for you to help you get one step closer to being in a house you can call your own.