Can you buy a house after bankruptcy?

Bankruptcy is an unfortunate financial hardship, but it doesn’t have to spell the end of all of your big life dreams. You can still get a house after bankruptcy, but it presents extra hurdles compared to the traditional homebuying process. You can still buy a home, regardless of whether you’ve filed for Chapter 7 or Chapter 13 bankruptcy.

The biggest obstacle to buying a house after bankruptcy is simply time. Most loans and lenders have waiting periods and restrictions before lending to somebody with a bankruptcy on their financial record, and you’ll have to rebuild your credit, too.

It’s not easy, but buying a house after bankruptcy isn’t impossible. You should just be prepared for some challenges and understand that the process will look a little different than a normal experience. Here, we’ll help you navigate the entire process.

How long after bankruptcy can you buy a house?

If you declare bankruptcy, you must wait until a judge discharges or dismisses your bankruptcy before you can apply for a loan. The waiting period before you can apply, however, depends on the type of bankruptcy on your record and the type of mortgage you want.

Chapter 7

In the most common type of bankruptcy, a court wipes away your qualifying debts. However, your credit takes a major hit. After going through a Chapter 7, you must wait at least four years after a court discharges or dismisses your bankruptcy to qualify for a conventional loan.

Bankruptcy dismissal means you petitioned the court to let you enter bankruptcy, and they determined you didn’t qualify. Discharge prevents future action or collection against your loans and usually occurs about four months after filing for bankruptcy.

If you want a conventional mortgage loan, you’ll have to wait. Government-backed loans offer more forgiveness, though. 

FHA loans

Loans backed by the Federal Housing Administration (FHA) mortgage require borrowers to wait only two years after the discharge of a Chapter 7 bankruptcy to qualify for a loan. It could be even as little as one year if you can show documentation of extenuating circumstances that caused the bankruptcy.

VA loans

Loans backed by the Department of Veterans Affairs (VA) also require a waiting period of at least two years after a Chapter 7 discharge. Likewise, if you can document extenuating circumstances that caused the bankruptcy, you could qualify for a loan before two years.

The only way to get a VA loan before that is if you were self-employed, and the failure of your business caused the bankruptcy. Then, you must prove that you have since obtained a permanent position and don’t have other credit problems.

USDA loans

Lenders must scrutinize applications for USDA loans much more carefully if the applicant has a Chapter 7 bankruptcy that was discharged within the last three years. Because these loans are designed to spur development and community renewal, they could still choose to grant the loan, but you will have to have an otherwise sterling application.

Chapter 13

Chapter 13 bankruptcies are less serious than Chapter 7 bankruptcies. Rather than wipe out debt, Chapter 13 bankruptcies reorganize your debts, allowing you to make scheduled payments to your creditors. Typically, this will occur over a three to five year period, after which the court discharges your remaining debts. This has less of an impact on your credit score and allows you to keep assets.

The waiting period to get a conventional mortgage loan after a Chapter 13 bankruptcy depends on how a court handles your bankruptcy: 

• If the court dismisses it, you must wait at least four years from the dismissal date to apply for a loan. 
• If the court discharges the bankruptcy, the waiting period is likely four years from the date you filed and two years from your dismissal date. 
• If the court discharges your bankruptcy and you attempt to pursue a mortgage before the waiting period, you’ll have to get special court approval.

As with Chapter 7 bankruptcies, government-backed loans are more lenient. 

FHA loans

To get an FHA loan after a Chapter 13 bankruptcy, you must wait at least one year from the beginning of the payback period to qualify for a mortgage. You’ll also need written permission from the bankruptcy court to apply at any point.

VA loans

The VA requires you to be at least one year into a Chapter 13 payback plan to qualify for a mortgage.

USDA loans

To get a USDA loan within three years of a Chapter 13 bankruptcy, you must have successfully completed your repayment plan. That said, if you have a one-year history of meeting your payment obligations, you could qualify for a USDA loan.

Tips for buying a house after bankruptcy

So, you know how long you’ll have to wait after bankruptcy to purchase a home. Here’s what you need to do to make sure you’re in the best position to qualify for a loan when the time comes:

Repair your credit

Both Chapter 7 and Chapter 13 bankruptcy will hurt your credit. (Chapter 13 less severely so.) The absolute lowest credit score required by most mortgage lenders is 580 — even for government-backed loans. 

To repair your credit, start by opening a secured credit card. This means you put a cash deposit down with a company which becomes your line of credit. Each month, make payments on your account to pay off the debt and build up your credit score. Of course, pay off this line of credit and any other loans or debts on-time every single month to keep your credit from dipping.

As you improve your creditworthiness, continue to pay down your debt. If you get any influx of cash, use that to pay down your bankruptcy debt. This demonstrates to creditors that you’re motivated to get out of bankruptcy and helps your credit score. (Lower levels of debt will also help you qualify for a mortgage.)

Finally, some lenders might let you use non-traditional credit — like evidence of on-time rental payments, utility payments, cell phone payment, and insurance payments to qualify for a mortgage, so make sure you’re paying all of these on-time as well.

More about how to buy a house with bad credit

Write a bankruptcy explanation letter

Lenders are risk-averse and every mortgage is a risk. That’s why you have to get approval, because some risks are bigger than others. And when you have a bankruptcy on your record, that’s a major red flag.

Writing a letter of explanation will tell the lender more about your financial situation and the reasons you had to declare bankruptcy. Sometimes, those reasons are completely reasonable and could even be beyond your control. Make sure the lender understands the circumstances that led to you filing for bankruptcy and how you have improved your financial situation since then.

You don’t have to write a letter of explanation to a lender after a bankruptcy, but it helps them to understand you as a borrower better and can appeal to the human underwriter. If you do write one, include it with your mortgage application when you request preapproval.

Get preapproved for a mortgage

Once you’ve got your finances in order and gone through your waiting period, things may start to look a bit like a traditional homebuying process. You’ll need to get a preapproval letter before beginning your home search so you can demonstrate to sellers that you’re a serious buyer. Preapproval also gives you an idea of what you can actually afford since a lender won’t approve you for a mortgage amount that’s more than what you can pay.

To get preapproval, you’ll need some financial documentation. To expedite the process, have your last two W-2s, bank statements, and pay stubs available.

Respond to your lender

Any potential homebuyer has to work closely with their lender to make sure the process goes smoothly. If you’re coming out a bankruptcy, you need to be on it with your lender. 

They’ll review your income, assets, debt, and credit to see if you qualify for a mortgage before giving you preapproval. But as you move forward to the actual mortgage, your lender will likely have questions about your credit report and bankruptcy. (Especially if you haven’t proactively answered any questions in a bankruptcy explanation letter.)

Answer your lender’s questions honestly, transparently, and expeditiously to increase the likelihood of a quick approval.

Learn how to get your mortgage clear to close.

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