When can I buy a house after bankruptcy?

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A bankruptcy can affect many aspects of your life, not just in the present, but for many years into the future as well. Unfortunately, that includes how soon you can qualify for a home loan. For those who’ve filed for bankruptcy, and anyone considering such a move, this guide lays out the facts that apply in various scenarios. Depending on the type of bankruptcy, you may find buying a house after bankruptcy is only two to four years away.

Types of bankruptcies

First, it’s important to understand the differences between the two main types of bankruptcy filings.

Chapter 7 bankruptcy

Chapter 7 is the simplest and most common type of bankruptcy in the United States. You may have heard it referred to as “liquidation bankruptcy” because, as this informal term suggests, it involves the liquidation (sale) of your assets in order to pay the people and organizations (creditors) that are owed money.

Some assets are exempt, however, which means you (the debtor) won’t lose your home in many cases if you follow federal and state guidelines and satisfy the requirements of the Bankruptcy Code.

If you have a lot of consumer debt—credit cards, car loans, student loans and mortgages, for example—as opposed to debts incurred through business dealings, the court may rule that filing for chapter 7 is abusive.

Additionally, if your monthly income is higher than a certain standard, which is based on the state and median income of its population, filing for this type of bankruptcy is considered “presumptively abusive” if you fail a means test. The court looks back at your monthly income over the last five years while calculating various allowances, and if the means test is failed, you must provide proof of special circumstances.

In the absence of such justifications, you’ll be given the option of converting your bankruptcy filing to chapter 13 or having it dismissed.

Chapter 13 bankruptcy

Chapter 13 is the second most common type of bankruptcy and, as with chapter 7, it’s available to you as an individual debtor. One of the main differences with chapter 13 is that it involves the creation of a repayment plan that covers some or all of your debts. This repayment plan will run for a minimum of three years and a maximum of five years, depending on your monthly income compared to the median in your state.

It’s illegal for any individual or organization to attempt collection while the repayment plan is in effect.

Another big difference between and great benefit of filing for chapter 13 bankruptcy as opposed to chapter 7 is that it’s much easier to prevent foreclosure on your primary residence. You still need to pay your mortgage, however, so it shouldn’t be looked at as an easy way to avoid payments altogether. Non-mortgage payments can also be rescheduled and paid off over a longer period than the original agreement, although they must be paid during the repayment period to avoid liquidation.

As long as you’re within the repayment period, you’re protected from collection efforts and you won’t have to deal with the creditors themselves, because all applicable debts are grouped together. You only make repayments to a trustee who will then pay creditors.

Waiting periods after bankruptcy by mortgage loan type

It’s important to remember that the waiting period begins on the date your debt is discharged, not the date the bankruptcy was filed. Discharged debt in a bankruptcy filing is made permanently unenforceable against you, which means you don’t need to pay it. This generally occurs four months after successfully filing for chapter 7 and around one year after completion of the repayment plan for chapter 13.

FHA loans

Loans that are insured by the Federal Housing Administration are known as FHA loans. This type of loan is very common among first-time home buyers, and the administration also provides reverse mortgages to seniors. One of the big advantages of an FHA loan is its relatively low credit score requirement—you should aim for a minimum of 500.

If you filed for chapter 7, the waiting period for an FHA loan is 24 months after discharge. In the case of chapter 13, the waiting period is halved to 12 months.

VA loans

The U.S. Department of Veterans Affairs provides many useful benefits to veterans and their eligible dependents, including the VA Home Loan program. These loans aren’t issued by the VA itself. Instead, the VA works with private lenders and guarantees part of the loan, which helps you in various ways. For example, there’s no VA requirement for a down payment, although lenders can make it a requirement, and other costs are generally lower than those for other loans.

As with FHA loans, the waiting period for VA loans is 24 months after discharge of chapter 7 bankruptcy and 12 months after discharge of chapter 13.

USDA loans

The U.S. Department of Agriculture has several Rural Development loan programs that are generally targeted toward low-income residents and small businesses in rural areas. Among these programs are options useful for people who need a loan for single and multifamily housing.

The waiting period for a USDA loan can be a little longer than those previously mentioned, so you’ll need to wait 36 months after discharge of chapter 7 bankruptcy. In the case of chapter 13 bankruptcy, however, the waiting period is still 12 months after discharge.

Conventional loans

Generally, you’ll be waiting twice as long for conventional loans, regardless of bankruptcy type. The typical waiting period is 48 months after discharge of chapter 7 bankruptcy and 24 months for chapter 13. If your chapter 13 bankruptcy was dismissed, the waiting period is 48 months.

You may be able to secure a conventional loan with a shorter waiting period if you can prove extenuating circumstances, such as unexpected medical needs or other dramatic interruptions to your finances.

Bankruptcy and your credit score

Unfortunately, if you file for bankruptcy, you can’t avoid having that recorded on your credit report. And if you had good credit before the bankruptcy, you’re going to take a hit and lose anywhere from 130 to 240 points, based on your pre-bankruptcy score.

If you had poor credit before filing for bankruptcy, the effect on your credit may be less dramatically negative, or it might even be somewhat positive—this could happen as many negative items on your report are replaced by the bankruptcy itself.

In any case, your bankruptcy will remain visible for seven to 10 years when potential lenders check your credit report. Even a slightly higher score might be offset by the fact that some lenders will be wary of providing credit, making it more difficult for those who have filed for bankruptcy to get a new mortgage during this time.

Tips for buying a house after bankruptcy

Try out some of these tips if you want to buy a house after bankruptcy.

• Rebuild your credit based on these five factors:
  • Consistent, on-time payments. You’re judged on how often you’ve been late and how late the payments were made.
  • Total debt vs. available credit. If you’re close to the limit on your available credit, particularly from multiple sources at once, your score will likely decrease.
  • Credit history. This is affected by the average age of your credit sources. Having a long history is better, but only if it’s not full of late payments.
  • Recently opened accounts. If you’ve just applied for many accounts, your score will likely be lowered by the hard inquiries.
  • Range of credit. Having a variety of accounts—mortgage, credit card, other loans—could increase your score.

• Pay off your existing debts.
• Wait until you can afford a larger down payment.
• Get a cosigner, whose income will be used to judge the affordability of a loan and lower the required down payment.
• Get a preapproval letter, which helps you when shopping around by giving lenders more information on your finances.
• Simply wait seven to 10 years until the bankruptcy is cleared from your report, making lenders far less nervous about your ability to make payments.

Now that you’re aware of waiting times and credit repair factors, you need to know what score to aim for. We’ve got a few things to say about that, too, so take a look at our guide on credit scores for buying a house and set an appropriate target.

And, if you haven’t already started the filing process, there are some alternatives to declaring bankruptcy that may be better choices in certain situations. You may also want to speak to an attorney about your specific circumstances.

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Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.

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