How Long After Bankruptcy Can You Buy a House?

Buying a Home

How Long After Bankruptcy Can You Buy a House?

November 19, 2021

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Filing for bankruptcy can feel devastating. Not only is your credit score severely affected, but it will also be a long time before you can take out a loan whether it’s to buy a car or a house. However, the situation is not hopeless. With patience and an effective financial plan, it’s more than possible to get your financial records back to an optimal place.

In this blog post, we’ll discuss how long you should wait before applying for a loan after bankruptcy and the loan options available for those in that situation. We’ll also give tips on how you can rebuild your credit score.

Let’s get started.

The Different Chapters of a Bankruptcy

A bankruptcy can stay on your credit report for about 10 years. However, that doesn’t mean it is impossible for you to get a mortgage in those 10 years.

To apply for a mortgage loan, you need to wait until a judge discharges your bankruptcy.

For those of you who don’t know, a Bankruptcy discharge is an official order from a Bankruptcy court that states an individual has been released from any liability on certain debts. It also prohibits creditors from collecting on your discharged debts.

How long after bankruptcy can you apply for a loan depends upon the type of bankruptcy on your record.

A bankruptcy filing is categorized based on an individual’s financial condition. Each category is called a chapter and there are many different types of chapter that you can file under. Below are the 4 most common chapters that people file under.

  • Chapter 7 bankruptcy for Liquidation: A process in which the debtor has all of his debt discharged with exceptions such as child support, tax debts, student loans, personal loans, etc.
  • Chapter 11 bankruptcy for Reorganization: A process in which an individual or business or LLC pays their debts over time and retain their assets according to a plan approved by a court.
  • Chapter 12 bankruptcy: Designed for farmers or family fishermen to continue farming with a restructured payment plan for their debt.
  •  Chapter 13 bankruptcy: A process in which a debtor, who has stable income, is given a court-approved plan to pay their debts within 3 to 5 years. Their debt basically is restructured to be more manageable.

A Chapter 7 bankruptcy will have a major hit on your credit score. In a chapter 7 bankruptcy, the court dismisses your qualifying debts which can stay on your credit history for 4 years after.

On the other hand, a chapter 13 bankruptcy can stay on your credit record for about two years after the dismissal of bankruptcy to apply for a home loan.

Government-backed loans have less strict requirements for those who have filed for bankruptcy. Usually with a Chapter 7 bankruptcy, you can apply to government-backed loans after 3 years and 1 year with a chapter 13 bankruptcy.

What Are The Mortgage Options After Bankruptcy?

After the waiting period discussed above, bankruptcies will be removed from your credit record and the mortgage loans available to you will be based on your credit score. However, applying for an FHA loan might be a better option, as the waiting periods are shorter and credit score requirements are lower.

For instance, the minimum credit score for an FHA loan is as low as 500 (provided you can put at least 10% in down payment).

You can also look at USDA loans (U.S. Department of Agriculture) and VA loans (The Department of Veterans Affairs), which both have less strict requirements and a minimum credit score of around 640.

Check out this blog post to learn more about how to buy a home with bad credit.

Rebuilding Your Credit Worthiness 

Besides damaging your credit, filing for bankruptcy is going to give you a bad reputation. As someone who is applying for a mortgage after bankruptcy, you have to prove you are reliable to mortgage lenders. The only way of doing this is by rebuilding your credit score.

Here are 4 simple steps you can take to rebuild your credit score:

Get A Secured Credit Card

A secured credit card are typically used to help people with bad credit. The credit card is issued with a fixed deposit and how much you put in the deposit determines how much the credit limit will be.

Pay Down Your Debt

After the bankruptcy has closed, you can start managing your finances better by cutting down any extra expenses like impulsive shopping, eating out and so on. This will help you amass some cash, which you can use to reduce your debts. Paying down the debts will let creditors know that you are making serious amends in your life to change your financial situation, making it easier for you to qualify for a mortgage.

Pay Your Bills on Time

Paying your bills on time is the easiest and the quickest way to raise your credit score. Create a monthly budget, considering your income and need-to-have expenses. Avoid buying any unnecessary items. You won’t believe how much you can save by simply shifting your habit of eating out to cooking at home.These small changes will help you gain better control of your finances. And, if you still find it difficult to keep up with regular payments, you can always set up auto-pay that lets banks automatically deduct the minimum payment due from your credit card.

Check Your Credit Report Regularly

Another important thing you should do is check your credit report regularly and make sure that the information mentioned in it is accurate. Here are a few things you should check on credit reports:

  • Any credit reported as owed, late, outstanding, due, or converted, even when the bankruptcy is discharged.
  • Inaccurate information on the report due to identity theft, similar names, or wrong Social Security Numbers.
  • Wrong accounts listed i.e. accounts you did not list as part of the bankruptcy.
  • Any outdated information.

Try to check your credit score at least annually. You are offered one free credit report every year from Equifax, Experian, and TransUnion. Checking your score throughout the year or before applying for new credit is a great way to stay ahead of any problems that could arise. You could even check your credit score for free every 4 months.

Don’t Make the Mistake of Going for Credit Repair Services

You may find many credit repair services offered in the market. However, not all of them are legitimate. Therefore, it is advised to wait patiently for your credit score to build gradually over time. Once you have raised your credit score, you can begin your mortgage shopping.

Write a Letter of Explanation to Increase Your Chances of Securing a Mortgage

Although not a requirement, submitting a letter of explanation along with your mortgage application can give you a leg up on the competition. The letter provides the mortgage lender insights about the conditions that led to your bankruptcy, and how you have changed your financial health post the incident. You may also include the steps you have taken to prevent such events from repeating in the future.

A mortgage lender is taking a risk with his money whenever they are offering a mortgage to a borrower. A letter of explanation can be your means to build trust and ensure that you will make your payments on time.

On A Concluding Note

Going through bankruptcy can be difficult, but it is not the end of the world. You can buy a house after bankruptcy. However, timing is key. You have to wait until after the bankruptcy has been dismissed from your credit record to apply to any loans. While you’re waiting, spend that time rebuilding your credit score. That way after the bankruptcy is dismissed it’ll be as if it never happened.