Bankruptcy can have lasting negative effects on your finances and can feel impossible to bounce back from. But if you want to buy a home and a bankruptcy filing is still lingering on your credit report, you may not be completely out of luck.
Some lenders have mortgage solutions that may be available to you, even if it’s only been one or two years. But, again, it depends on the type of bankruptcy filed and the loan program you select.
Understanding Bankruptcy
Bankruptcy is a significant financial impact that will impact your ability to access capital. It’s still possible to buy a house in some cases, but it’s important to understand how bankruptcy works so you know your options.
What is Bankruptcy?
Bankruptcy is a legal process that helps people address debt that they can no longer pay. Some people have their assets liquidated to cover debt in a Chapter 7 bankruptcy. Another option is to establish a new payment plan through a Chapter 13 bankruptcy. The bankruptcy court will hear the case.
Can You Buy a House After Bankruptcy?
It’s possible to buy a house after bankruptcy, and some mortgage lenders will work with borrowers shortly after bankruptcy. The waiting window for most types of loans starts after the bankruptcy discharge. Fannie Mae, Freddie Mac, the Federal Housing Administration, the Department of Veteran Affairs, and other types of mortgage providers have different timeframes.
The type of bankruptcy also impacts the amount of time it will take for you to get a mortgage. The good news is that you can get an FHA loan within two years of your discharge date for a Chapter 7 bankruptcy.
How Does Bankruptcy Affect Your Mortgage?
If the bankruptcy is only a few years old, chances are your credit score is on the lower end. Even if it’s high enough to qualify for a home loan, you could get a steep interest rate since the risk of default is higher.
Factors Determining Your Ability to Buy a House Post-Bankruptcy
These are some of the factors that will influence your ability to buy a house after a recent bankruptcy:
- The type of mortgage you want
- The type of bankruptcy
- How long it has been since the discharge date
- Your credit score and debt-to-income ratio
- The letter of explanation
Is It Possible to Buy a Home After Bankruptcy?
In short, yes, buying a house after bankruptcy is possible. However, the waiting period depends on the type of bankruptcy you filed and the home loan you’re pursuing.
Chapter 7
You can get a mortgage between one and four years following the discharge or dismissal of a Chapter 7 bankruptcy filing. But, again, it depends on the type of home loan you’re applying for.
Chapter 13
There’s a bit more leniency with Chapter 13 bankruptcy filings. It’s possible to secure a mortgage as soon as one year, although most home loan products have a waiting period of two or four years.
How to Buy a House After Bankruptcy
You can work on building your credit with on-time payments and keep debt at bay. This approach will put you in a better position when you become eligible for various types of loans once enough time has passed from your discharge.
Mortgage lenders will also want a letter of explanation detailing how you got into bankruptcy. They might be more lenient if a one-time, hard-to-anticipate expense like medical bills led to bankruptcy. Then, you will have to provide basic details that everyone else provides, such as your ID, proof of income, and proof of address.
An FHA loan may be the best choice for buying a house quickly. This type of mortgage doesn’t require a lengthy waiting period, and it’s possible to get financing if you have a 500 credit score. If your credit is between 500 and 579, you will have to make a 10% down payment, while a score of 580 or higher only requires a 3.5% down payment. Your debt-to-income ratio is still an important factor that may require a higher down payment.
What Types of Mortgages Can You Get After Bankruptcy?
You may be eligible for a conventional mortgage or government-backed loan after bankruptcy. There are also non-conforming mortgage products available through private lenders, like Angel Oak Mortgage Solutions, that could be a good fit for you. More on those shortly.
How Soon Can You Get a Home After Bankruptcy?
Below is a breakdown of the waiting periods following bankruptcy by mortgage type. You’ll also find exceptions to the rules, referred to as extenuating circumstances contributing to your bankruptcy filing, that could make the mandatory waiting period shorter. For the latter, they’re typically occurrences that are isolated events beyond your control.
FHA Loans
- Chapter 7 Bankruptcy: two years from the date of dismissal or discharge
- Chapter 13 Bankruptcy: no waiting period if the court has discharged or dismissed the bankruptcy
- Extenuating Circumstances: an economic event resulting in a reduction of at least 20 percent of your household income for six or more months
VA Loans
- Chapter 7 Bankruptcy: two years from the date of dismissal or discharge
- Chapter 13 Bankruptcy: no waiting period if the court has discharged or dismissed the bankruptcy
- Extenuating Circumstances: lengthy labor strikes or periods of unemployment along with medical expenses you were forced to pay out of pocket as the services or medications rendered weren’t covered by your health insurance policy
USDA Loans
- Chapter 7 Bankruptcy: three years from the date of dismissal or discharge
- Chapter 13 Bankruptcy: one-year waiting period (dismissals and discharges)
- Extenuating Circumstances: layoffs, reduced benefits, medical issues or payment disputes as they relate to services or goods you purchased that were defective
Conventional Loans
- Chapter 7 Bankruptcy: four years from the date of dismissal or discharge
- Chapter 13 Bankruptcy: four years from the date of dismissal (if your bankruptcy is dismissed) or four years from the filing date and two years from the date of dismissal (If your bankruptcy is discharged)
- Extenuating Circumstances: non-recurring events, like hits to your income, unemployment, medical conditions and divorce
Tips to Buy a Home After a Bankruptcy
You’ll likely have to wait a bit following your bankruptcy to purchase another home. However, there are tips you can follow to prepare in the meantime and help make the process more seamless when the time comes to apply for a home loan.
Rebuild Your Credit and Monitor Your Credit Reports
When you filed for bankruptcy, your credit score likely took a huge hit. But it’s possible to start building it back up, and it helps to understand how FICO scores are calculated so you’ll know how your debts impact your credit score.
This credit-scoring model is used by 90 percent of creditors to make lending decisions. FICO scores range from 300 to 850 – the higher, the better – and are calculated as follows:
- Payment history: 35 percent of your FICO score
- Amounts owed: 30 percent of your FICO score
- Length of credit history: 15 percent of your FICO score
- Credit mix: 10 percent of your FICO score
- New credit: 10 percent of your FICO score
There’s also VantageScore, which is slowly rising in popularity. The score range is the same, but the way your score is calculated is slightly different:
- Total credit usage, balance and available credit: Extremely influential to your VantageScore
- Credit mix and experience: Highly influential to your VantageScore
- Payment history: Moderately influential to your VantageScore
- Credit history and credit age: Less influential to your VantageScore
- Recently opened accounts: Less influential to your VantageScore
To start rebuilding credit, add a positive payment history to your credit report by making timely payments on all your current debt obligations and other bills to keep collections off your credit profile. You can also get a secured credit card to help you get back on track. In addition, you’ll need to make a security deposit, which is typically equivalent to the credit limit. But remember to make timely payments each month on or before the due date and keep the balance low to have the best shot at rebuilding your credit.
(Quick note: Look beyond your FICO score to gauge your credit health. Be sure to review your credit reports from the three major credit bureaus—Experian, TransUnion, and Equifax—to confirm they’re free of errors that could be dragging your credit score down. If you spot any inaccuracies, file disputes promptly with the appropriate credit reporting agencies to have them rectified).
Pay What You Owe on Time and Keep Your Debts to a Minimum
As mentioned above, payment history makes up 35 percent of the FICO credit-scoring model, which is used by 90 percent of creditors and lenders to make lending decisions. So, it’s vital to pay your bills on time. If any accounts are past due, pay the delinquent balances as soon as possible or make arrangements with creditors to bring them current over time.
It’s equally important to keep the balances on your revolving debts (or credit cards) low. Remember, your credit utilization, or the amount of available credit in use, accounts for 30 percent of your FICO score. So, ideally, you want to keep your utilization at or below 30 percent – 10 percent or lower, which is even better to help improve your credit score. Plus, a lower debt load equates to a lower debt-to-income (DTI) ratio, which could make it easier to qualify for a mortgage loan.
Understand How Your Credit Rating Impacts Borrowing Costs
The stronger your credit score, the more likely you are to receive a lower interest rate. That said, you’ll save a bundle in interest and get a more affordable monthly payment.
Take a look at the average annual percentage rate (APR) and monthly payment on a $375,000, 30-year fixed loan by credit rating:
- 620 to 639: APR of 8.072 percent and $2,770 monthly payment
- 640 to 659: APR of 7.526 percent and $2,629 monthly payment
- 660 to 679: APR of 7.096 percent and $2,519 monthly payment
- 680 to 699: APR of 6.882 percent and $2,465 monthly payment
- 700 to 759: APR of 6.705 percent and $2,421 monthly payment
- 760 to 850: APR of 6.483 percent and $2,366 monthly payment
Create a Spending Plan
Navigating the bankruptcy process was likely challenging and overwhelming at times. But are you prepared to take the necessary steps so history doesn’t repeat itself? A realistic budget is an ideal way to be proactive about your spending habits and overall financial health.
It gives you a game plan for your income and makes it easier to stay on track and hit financial goals or targets. Furthermore, being more intentional with how you spend money also means you’re less likely to overspend on unnecessary items and get right back into debt.
Opt for a Non-QM Loan
Consider anon-qm loan that isn’t backed by the federal government, as they generally have more flexible qualification criteria. It’s called the Portfolio Select Home Loan and only requires a two-year waiting period following bankruptcy to be eligible for funding. Loan amounts range from $250,000 to $2.5 million.
You could also reach out to Angel Oak Mortgage Solutions, a full-service mortgage lender specializing in non-qm loans. They will be able to help you only after 2 years of your latest bankruptcy or credit event if your score is 600 or over. Inquire about this home loan product or others that may be available to you by completing the online form, and an Angel Oak team member will contact you to discuss options.
Get Preapproved If You Can
Before formally applying, shop around to find reputable lenders. Once you have a short list, get preapproved to determine if you’re eligible for a mortgage and how much you qualify for. Doing so helps you compare home loan options to find the best fit. Plus, it makes your home search easier since you know how much the lender is willing to lend you, and it’s generally required when making an offer on a home in today’s competitive market.
Include an Explanation in Writing
Draft a letter explaining the circumstances surrounding your bankruptcy and how you’ve modified your behaviors or changed your financial situation to prevent history from repeating itself. A written explanation provides greater insight into your side of the story that led to the extenuating circumstances, and the underwriter may consider it when you apply for a mortgage.
Conclusion: Overcoming the Challenges of Bankruptcy
It is possible to buy a house and strengthen your finances even after bankruptcy. The best thing you can do after bankruptcy is to review your finances and stay on top of them. Building your credit score will give you more choices when it’s time to apply for loans. Taking it one day at a time and developing the groundwork by growing your income can help you own a home even after enduring bankruptcy.
