When Can I Get a Mortgage After Bankruptcy?
Learn how long it takes to get an FHA, VA, USDA, or conventional mortgage loan after Chapter 7 or Chapter 13 bankruptcy.
Filing for bankruptcy doesn’t have to put a damper on your home buying dream—at least not for long. Lenders are easing up on requirements and opening the door for bankruptcy filers to get back into a home far sooner than they’d been able to in the past. In fact, the average waiting period is two years. In this article, you’ll learn about common mortgage loans and the respective eligibility requirements for bankruptcy filers.
Federal Housing Authority (FHA) Loan
An FHA loan is a federally-insured loan. It’s attractive to first-time, cash-strapped home buyers because it offers the ability to put down as little as 3.5% of the purchase price. Additionally, the credit score requirements are more liberal than conventional loans. You’ll likely qualify with a 640 credit score, or even a score as low as 580 if you can afford a higher interest rate.
After a Chapter 7 Bankruptcy Discharge
In most cases (but not all), you’ll need to wait two years from the date of your Chapter 7 bankruptcy discharge before you’ll qualify for this loan. Keep in mind that a discharge date isn’t the same as the filing date. In most cases, you’ll receive your discharge paperwork just before your case closes.
Credit requirements. Meeting credit requirements won’t be as much of a hurdle as you might think. If you open new credit accounts after your bankruptcy, you’ll need to show that you’ve established a good credit history by paying your payments on time. But you don’t have to launch into a credit rebuilding plan. Instead, you can choose to avoid using credit altogether during the two years following your discharge.
Speeding up the process using the 12-month exception. At times, people file for bankruptcy due to no fault of their own. If you fit into this category and can demonstrate that filing for bankruptcy was beyond your control, you might be able to reduce the waiting period to twelve months. Additionally, you’ll need to show that you’ve handled your financial affairs responsibly after the bankruptcy.
After You’ve Filed for Chapter 13 Bankruptcy
Filing for Chapter 13 bankruptcy is a long three- to five-year process—but that doesn’t mean that you can’t buy a house during that time. You can obtain an FHA loan before you complete your plan if you meet the following conditions:
- You’ve paid 12 months of plan payments.
- The court approves your request to purchase a house with an FHA loan.
Keep in mind that the court might not be on board if you’d have to reduce the amount paid to your creditors. And if you have to present the terms of the house purchase in your motion (the legal procedure you’ll use to make your request), you might have a hard time closing the deal. Many sellers would be unwilling to take their house on the market on the chance that you’ll obtain the necessary court approval.
If you’re considering this option, you should consult with a knowledgeable bankruptcy attorney before filing. A lawyer can advise you about the feasibility of a future loan qualification and, if possible, assist you by putting together a repayment plan that will help you reach your goal.
United States Department of Agriculture (USDA) Loan
Low- and middle-income borrowers willing to purchase a home in a rural community will benefit from this product. It offers a low-interest, no down payment option for those who might not otherwise be able to qualify for conventional financing.
Applicants will be eligible for this loan three years after receiving a Chapter 7 discharge. However, if you qualify for the exceptional circumstances exception—for instance, by demonstrating that the bankruptcy was beyond your control and not a result of financial mismanagement—you might be able to qualify as soon as 12 months after the discharge.
A Chapter 13 bankruptcy filer can apply after 12 months of successful plan payments, or sooner on a showing of exceptional circumstances. To find out more, visit the United States Depart of Agriculture Rural Development website.
Veteran’s Affairs (VA) Loan
The VA loan program is a benefit given to veterans to help with housing needs. Here are some of the hallmarks of this loan program:
- no down payment
- no minimum credit score
- greater allowance of seller credits and concessions than other loan products, and
- unlimited use of the loan program.
You’ll be able to qualify after you can show two years of “clean” post-bankruptcy credit. In other words, there’s a two-year waiting period for this loan type—and possibly longer if you experience credit issues along the way. Keep in mind that individual lenders participating in the VA program can require a specific credit score (asking for 620 or higher isn’t unusual).
For additional information, you can visit the U.S. Department of Veterans Affairs website.
The government doesn’t insure conventional loans. Instead, you’ll protect the lender against loss by paying private mortgage insurance each month. The insurance will pay the lender if you’re unable to make good on your obligation. (You’ll likely be able to stop the insurance payment once the property equity equals 20% of the initial mortgage amount.) Also, interest rates and credit score requirements tend to be higher than that of an FHA mortgage.
Why Would You Want a Conventional Loan?
This loan product can help people with higher debt loads purchase a home. Not only can you have a higher debt-to-income ratio, but the way the lender will calculate your student loan payment might be more lenient, too.
That’s not to say that the bank will accept your monthly income-dependant payment amount—it won’t. But you can use a fully-amortized payment instead of the commonly accepted 1% of the total loan balance formula (the FHA guideline that disqualifies many with student loan debt).
Example. Suppose that you owe $100,000 in student loan debt. Using the 1% of the balance criteria, you’d be attributed a payment of $1,000 per month. However, $100,000 amortized over 30 years at 5% interest is $537 per month—an amount significantly less. You’ll be in a better position to receive a mortgage approval under the second scenario.
Conventional loans used to have the longest post-bankruptcy waiting period, but it’s not the case anymore. Eligibility conditions have eased and now, depending on your circumstances, you’ll wait two to four years, as follows:
- Chapter 7 bankruptcy. You’ll be eligible 24 months after the discharge or dismissal if the bankruptcy was beyond your control, or after 48 months if the discharge was due to financial mismanagement.
- Chapter 13 bankruptcy. You’ll need to wait 24 months after receiving your discharge, or 48 months after a dismissal (cases often get dismissed for failing to complete a plan).
If you’ve filed more than one bankruptcy within the preceding seven years, you’ll have to wait five years.
Additional Requirements and Assistance
It won’t come as a surprise that you’ll need to meet other criteria, too—although you might not realize that individual lenders could impose tougher guidelines. Even so, with persistence, it's likely that you’ll find a bank who will be willing to work with you.
Additionally, your state could have a first-time home buyer program to help with your down payment. With the right combination of programs, you’ll be in your new house in no time.
You can find out how to rebuild your credit in our Your Credit & Bankruptcy area.