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Can You Buy a House After Bankruptcy?

Although often necessary, filing for bankruptcy brings concern and worry that your finances may never recover. Many people believe that filing bankruptcy means never being able to buy a house. However, bankruptcy is more common than you might think. In fact, many people who have previously filed for bankruptcy do recover financially and end up purchasing a new home once their finances are back in order.

How Long After Bankruptcy Can You Buy a House?

If you've filed bankruptcy, you likely won't be able to buy a new home right away. There is a period following the bankruptcy that you'll need to wait, depending on the type of bankruptcy you've filed. You will also need to wait until your bankruptcy case has been successfully filed and discharged or dismissed.

Chapter 7

Chapter 7 bankruptcy is the most popular individual bankruptcy filing, which usually uses some or all of your assets to pay off some of your debt. A Chapter 7 bankruptcy may negatively impact your credit score for some time, because in the end you usually receive a full discharge of debt.

If you are applying for a U.S. Department of Agriculture (USDA) loan and have filed for Chapter 7, you will need to wait a minimum of three years following the dismissal or discharge of your case. Federal Housing Administration (FHA) or Veterans' Affairs (VA)-backed mortgages usually require you to wait two years after the dismissal or discharge of your bankruptcy. Conventional lenders require borrowers who have filed a recent Chapter 7 bankruptcy to wait a minimum of four years before considering your mortgage application.

Chapter 13

Chapter 13 bankruptcy is a bit more complicated and is often used to restructure debts or, sometimes, to buy time on a house that is required to sell to make financial restitution to creditors. Chapter 13 bankruptcy usually involves a repayment agreement, which is sometimes less damaging to your credit score than a Chapter 7 filing.

Following discharge or dismissal of a Chapter 13 bankruptcy, you can usually apply for an FHA or VA-backed loan without a waiting period. However, USDA loans require a one-year wait. Conventional lenders still require a four-year waiting period following dismissal of a Chapter 13 case. With either type of bankruptcy, it might be helpful to have a bankruptcy attorney on your side to help you throughout the process.

Focus On Your Finances

Because there's a chance you might have to wait before applying for a mortgage, it's important to take a look at your finances. This is a good time to start working toward your financial health, not just to buy a house in the future, but also to apply for other types of credit or loans in the future.

Build a Budget and Start Saving

Setting a budget, avoiding unnecessary debt, and sticking to financial goals can help keep you on track moving forward. It's crucial to take an inventory of your finances now that you have a clean slate. Build a budget and calculate how much you'll be able to afford once you're ready to buy a house.

Repair Your Credit

Americans are entitled to a free annual credit report check from each of the credit bureaus: Equifax, TransUnion, and Experian. Getting an accurate picture of your financial health each year can help you to understand what is helping and hurting your credit score.

Bankruptcy of any sort can hurt your credit score and appear on your credit reports for several years. Chapter 7 bankruptcy will stay on your credit for as long as 10 years, Chapter 13 as long as seven years. To rebuild your credit score, you can consider options such as secured credit cards that allow you to build a positive credit history in exchange for a security deposit. The best thing you can do to repair your credit is to make sure you make all of your payments on time.

Keep Your Financial Documents Organized

Whether you're planning on filing for bankruptcy or you've already filed, you'll need to be sure to keep your financial documents organized. Keep any paper and electronic receipts in organized files. It might also be a good idea to scan paper documents into electronic format and print electronic documents, in case of an emergency. Keeping organized records is important in potential legal arguments and can help you to be more aware of your current financial health.

Some of the other types of documents you should keep organized include:

  • Bank, credit card, and loan statements
  • Tax records
  • Insurance documents
  • Legal documents
  • Medical bills
  • Investments

Shopping for Mortgages

Keeping your documents in order and repairing your credit score are important steps when planning to buy a house after bankruptcy. It's also important to shop for mortgages to be sure you choose the right type for your situation. Preparing a solid, honest letter of explanation for potential lenders can help to explain any past financial struggles that no longer apply.

Consider shopping for a government-backed loan, which often has a shorter waiting period following discharge or dismissal of your bankruptcy.

Also, be sure to scrutinize and comparison-shop various interest rates. Even a portion of a percentage point, let alone a full point, can make or break a budget when the principal is as high as it typically is in a property sale.

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