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Can You Buy a House After Bankruptcy?

Key Takeaways:

  • If you've filed for bankruptcy, you likely won't be able to buy a new home right away.
  • Depending on the type of bankruptcy filed and the types of mortgage loans, there is a period following the bankruptcy that you'll need to wait.
  • Keeping your documents in order, rising above a minimum credit score, and finding the right mortgage are essential steps when buying a house after bankruptcy.

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. Many people who have previously filed for bankruptcy recover financially and purchase a new home once their finances are back in order.

If you have questions about bankruptcy options and how to apply for a home loan after going through bankruptcy, talk to an experienced bankruptcy attorney for advice.

How Long After Bankruptcy Can You Buy a House?

If you’ve filed for 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 filed (Chapter 7 and Chapter 13) and the types of mortgage loans. You must also wait until your bankruptcy court case has been successfully filed and discharged or dismissed.

Buying a Home After Chapter 7

Chapter 7 bankruptcy is the most popular individual bankruptcy filing. This usually involves liquidating 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 complete discharge of debt. It generally takes four to six months to go through a Chapter 7 bankruptcy.

If you are applying for a U.S. Department of Agriculture (USDA) home loan and have filed for Chapter 7, you must wait three years following the discharge date. Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) mortgages usually require you to wait two years after the bankruptcy discharge.

Conventional loans require borrowers who have filed a recent Chapter 7 bankruptcy to wait at least four years before considering their mortgage application. You will still have to apply for a home loan, which can depend on your post-bankruptcy credit score, financial situation, and existing debts.

If a foreclosure was erased by a Chapter 7 bankruptcy’s extenuating circumstances, the Freddie Mac and Fannie Mae recovery time period could be counted from the date of the bankruptcy.

Chapter 13 and Home Buying

Chapter 13 reorganization bankruptcy is a bit more complicated and is often used to restructure debts. Chapter 13 bankruptcy usually involves a repayment agreement, which is sometimes less damaging to your credit score than a Chapter 7 filing. A Chapter 13 bankruptcy repayment plan generally takes from three to five years.

Following discharge or dismissal of a Chapter 13 bankruptcy, you can usually apply for an FHA loan or VA loan without a waiting period. However, USDA loans require a one-year wait. Conventional lenders still require a four-year waiting period following the 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 Personal Finances

Because there’s a chance you might have to wait before applying for a mortgage, it’s essential to take a look at your finances. This is an excellent 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 new debt, and sticking to financial goals can keep you on track moving forward. It’s crucial to inventory 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 real estate, putting your savings towards a down payment.

Repair Your Credit

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

Bankruptcy 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, and Chapter 13 for as long as seven years. To rebuild your credit score, you can consider options like 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 all your on-time payments.

Keep Your Financial Documents Organized

Whether you plan on filing for bankruptcy or have already filed, you must 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 essential in potential legal arguments and can help you be more aware of your financial health.

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

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

Shopping for Mortgages

Keeping your documents in order and rising above a minimum credit score are necessary when buying a house after bankruptcy. It’s also essential to shop for mortgages to be sure you choose the right type of loan 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 FHA mortgage, which often has a shorter waiting period following the discharge or dismissal of your Chapter 7 or Chapter 13 bankruptcy. Ask your real estate agent about qualifying as first-time home buyers.

Also, be sure to scrutinize and comparison-shop various mortgage lenders, interest rates, mortgage insurance, and mortgage payments. Even a portion of a percentage point can make or break your monthly payments when the principal is as high as it typically is in a property sale. Remember, you can refinance down the road if you maintain good credit.

Homeownership is possible after bankruptcy as long as you’re patient. If you have questions about buying a home after bankruptcy, ask an experienced bankruptcy lawyer for advice.

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