Buying a home after Chapter 7 bankruptcy
If you had bankruptcy a year or more ago, you could start getting your finances back in order. You might even think about buying a home.
The good news is that it is possible to buy a home after a Chapter 7 or Chapter 13 bankruptcy.
However, there is a waiting period before you can take out a mortgage – usually at least two years. And lenders will carefully examine your credit score, credit reports, bankruptcy relief details, and other factors to make sure you qualify.
After bankruptcy, exercise caution and take steps to improve your bankroll. With hard work and patience, you can finally get a home loan.
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Waiting times after buying a house according to Chapter 7
After a bankruptcy is done, it will take time for your credit and savings to return to home buying levels. And lenders want to know that your financial situation is fully recovered before they approve you for a new mortgage.
Therefore, lenders enforce a minimum waiting period or "spice period" before borrowers can apply for a mortgage after bankruptcy.
The minimum waiting times for a mortgage under Chapter 7 are as follows:
FHA Loans – 2 Years VA Loans – 2 Years USDA Loans – 3 Years Conventional Loan (Fannie Mae or Freddie Mac) – 4 Years
Note: These are the minimum requirements for any loan program. Some lenders require you to wait longer.
For example, some lenders will ask you to wait 3 years before applying for an FHA loan, rather than the 2-year minimum required by the federal housing department.
There are some rare situations where borrowers may be approved before the 2 year mark outlined below has expired. However, for most potential home buyers, these minimum requirements are strictly adhered to.
Take the time to keep your credit score as high as possible and save for a larger down payment. Both strategies will help you get a lower mortgage rate and a cheaper home loan when you buy.
Check your home purchase eligibility (January 6, 2021).
When does the waiting period start?
Note that the 2 to 4 year waiting period after Chapter 7 bankruptcy does not begin until a court has closed or dismissed your bankruptcy.
This is the end of the bankruptcy process – usually 4 to 6 months after your first filing.
As you count down the days until you can apply for a mortgage, you need to start your calendar on the correct date – discharge or discharge – as it makes a big difference in when you hit the 2 year mark.
Can I buy a home 1 year after exiting Chapter 7?
In most cases, the waiting period from your Chapter 7 discharge date is at least two years before you can be approved for a home loan.
"There are some limited circumstances in which you can obtain a loan after a year of discharge," said Andrea Puricelli, manager of production resource engagement at Inlanta Mortgage.
"But that is only possible if the bankruptcy was caused by extenuating circumstances beyond your control and you have since demonstrated an ability to manage your financial affairs responsibly."
Such "attenuating circumstances" could apply if you have been forced into bankruptcy because of serious illness or loss of job or reduced income.
However, in most cases it will take more than a year to recover from the bankruptcy declaration. As such, most home buyers will have to wait at least two years before they can apply.
FHA Loans After Chapter 7 Bankruptcy
Fortunately, after Chapter 7, you can qualify for an FHA loan. However, wait a while to get approved.
“Bankruptcy is not going to stop you from making a big purchase like a home in the future. Yes, it is possible to get an FHA home loan after Chapter 7 bankruptcy, ”says Jeremiah Heck, a debt and bankruptcy attorney.
"Typically, you have to wait at least two years after your bankruptcy is approved by the courts to be eligible."
However, in some cases, the mortgage lender may need additional time.
"For example, some banks are asking potential borrowers who have filed for Chapter 7 bankruptcy to wait a total of three years to become eligible," added Heck.
In addition to waiting, you will need to meet other FHA loan requirements. These typically include:
Credit score of at least 580Down payment of 3.5% or more debt-to-income ratio below 50% Stable income and employment source of income is expected to last 3 years
Avoiding new debts after bankruptcy – for example, a car loan or personal loan – can improve your chances of qualifying for an FHA mortgage after the two-year waiting period is up.
Requirements for Other Types of Mortgage Loans
An FHA loan isn't the only type of loan that will put you on the home ownership fast lane. VA loans also have a qualifying period of at least two years from the date of your Chapter 7 discharge.
To qualify for a VA loan, you must be an eligible veteran, service member, or a member of an associate group (including some spouses).
"For a USDA loan, the waiting period is three years, with a few exceptions based on filing for bankruptcy," said Heck.
Note that these types of loans require a higher minimum credit rating than FHA loans.
To qualify for a conventional mortgage or VA loan, you usually need a credit score of 620 or higher. USDA mortgages require a FICO score of 640 or higher.
The FHA's lower credit requirements – starting at 580 – make this type of loan more accessible for home buyers with a Chapter 7 bankruptcy in their credit history.
Is It Difficult to Buy a Home After Bankruptcy?
"Immediately after bankruptcy, it will be very difficult to get a loan for a few years," said Reggie Graham, branch manager at Silverton Mortgage.
He notes that home buyers who file for bankruptcy can often expect higher down payment requirements and higher interest rates.
“Your focus should be on rebuilding your credit in preparation for applying for a mortgage loan when you are ready,” says Graham.
Note that a bankruptcy filing will remain on your credit reports for 10 years.
"This does not hinder your ability to buy a home. However, it is realistic to acknowledge that a lender will consider this fact when considering your loan application," warns Heck. "My suggestion is to expect two to three years to see your financial results Rebuilding health after a bankruptcy. "
Graham also suggests that if you file for bankruptcy instead, the waiting time to buy a home may be shorter.
"Chapter 13 involves repaying an agreed-upon portion of your debt that lenders are kinder to consider," he explains.
This will improve your chances
In order to get a mortgage after a bankruptcy, you need to demonstrate to lenders that you can responsibly manage your finances.
"To do that, you need to establish good credit habits and make sure you don't overuse the credit," says Puricelli.
Follow these tips from Graham to restore your credit faster:
Pay all of your bills on time and in full
Check your credit score as well three free credit reports often and deny everything inaccurate
Don't take on unsecured debts such as personal loans or credit cards, which are most likely to come with high interest rates
Get a secure line of credit or credit backed up with a deposit that you paid previously
Also, having a friend or relative sign on to new lines of credit can help you qualify and build new credit.
However, this strategy carries a high level of risk as the co-signer agrees to assume your new debt if you cannot pay it off. And when credit goes bad, your credit will take a hit too.
Buying a Home According to Chapter 7 Bankruptcy FAQ
How soon can I buy a home after getting out of Chapter 7?
Most home buyers must wait at least 2 years after being released from Chapter 7 before they can be approved for a home loan. It may be possible to qualify earlier if you have been forced into bankruptcy for reasons beyond your control. However, early approval is rare.
What is the Average Credit Score after Chapter 7?
According to attorney Jeremiah Heck, the average creditworthiness after a Chapter 7 bankruptcy is typically between 400 and 500 years. To qualify for a home loan, you usually need a credit score of 580-620 or higher.
After Chapter 7, can you buy a house with a co-signer?
Yes, having a co-signer can improve your chances of getting a mortgage after bankruptcy. “But remember, this can be a risky move for the co-signer. When you choose this option, you want to be sure that you can make monthly payments on time, ”recommends Graham. Also, after a bankruptcy, you will likely have to wait two to four years to apply for a mortgage loan, even with a co-signer.
Can I get a VA loan 1 year after Chapter 7?
Usually not. The minimum waiting time for a VA loan to be granted after Chapter 7 bankruptcy is two years.
Can I get an FHA loan after Chapter 7?
Yes, provided you build your bankroll back and wait two years after your bankruptcy is approved by the courts. Avoiding new debt after bankruptcy can also improve your chances of qualifying for an FHA mortgage.
What Credit Do I Need for an FHA Loan?
Once your credit score is above 580, you have a better chance of qualifying for an FHA loan. “However, many lenders might ask for a higher score. If your credit score falls below 580, you may still be able to qualify for an FHA loan even though a higher down payment is required, ”said Reggie Graham, branch manager of Silverton Mortgage.
How Much Down Payment Do I Need for an FHA Loan?
If your credit score is 580 or higher, you may only need a 3.5 percent down payment. "However, if you take out an FHA loan and your score is lower, the down payment required must typically be at least 10 percent," notes Heck.
What are today's mortgage rates?
Today's mortgage rates are at historic lows.
Typically, home buyers who file after Chapter 7 bankruptcy are charged higher interest rates. However, if you shop in today's low interest market, you can get a fair deal on your home loan.
If you are considering buying a home, check with some mortgage lenders to check eligibility for a home loan and find out what interest rates you will qualify for.
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