Buying a House after Chapter 7 Bankruptcy

January 11th, 2019 by Bunch & Brock

After receiving a bankruptcy filing discharge in Kentucky, it is time to look forward. One of the best reasons to file bankruptcy is to leave past problems behind and move toward a fresh start. You will be free of the burden of unmanageable debt, but you will also face the challenge of a lower credit score.

If buying a house after Chapter 7 bankruptcy is your dream, this is a potentially achievable goal. Many people surprisingly learn they may qualify for a post-bankruptcy mortgage much sooner after filing than expected.

How Soon After Chapter 7 Can You Buy a House?

You can purchase a home after a Chapter 7 filing, but the process may be challenging. A Chapter 7 bankruptcy will stay on your credit report for 10 years. This means the bankruptcy information remains accessible to all banks and other potential lenders for a decade.

Challenges of Buying a House After Bankruptcy

The good news is that this does not exclude you from getting credit for 10 years. However, banks will consider you to be a credit risk. You may not receive the most desirable rates and terms on loans.

Here’s more good news: This is a temporary situation. The impact of bankruptcy recedes with each passing year. If you take steps to rebuild your credit, you can improve your score substantially, starting after two years.

Can You Buy a House After a Bankruptcy Using a Traditional Mortgage Loan?

Depending upon your circumstances and the type of mortgage you may qualify for, you could obtain a loan within a year of your Chapter 7 bankruptcy discharge date. This is the best-case scenario. It often applies in situations with government-backed loans where borrowers can show extenuating conditions as the cause of their bankruptcies. These may include a serious illness, the death of a spouse, or a natural disaster.

In other cases, the following timelines apply to those wondering how soon after a Chapter 7 bankruptcy can you buy a house with a mortgage loan.

Can I Get an FHA Loan After a Chapter 7 Filing?

Under normal bankruptcy circumstances, the FHA will consider you for a home loan two years past your discharge date. A pristine credit history from the date of discharge will go a long way here. However, a lack of credit will not eliminate you from consideration for an FHA loan. So if you are wondering, can I get an FHA loan after a Chapter 7 bankruptcy filing, this is one of your best options.

Can I Get a VA Loan After a Chapter 7 Filing?

A VA loan is also an option once you move past the two-year waiting period after bankruptcy. Most VA lenders do require a minimum credit score of 620. You will need to work on your credit before applying for a VA loan.

Can I Get a Conventional Loan After a Chapter 7 Filing?

Generally, if extenuating circumstances led to your bankruptcy, you may qualify for bank or mortgage lender financing within two years. Otherwise, you will probably need to wait four years to qualify for a conventional loan. Some private lenders make exceptions in some cases.

Most lenders follow Fannie Mae guidelines. This means you would need to demonstrate clearly successful efforts to rebuild stable credit after your bankruptcy discharge.

How Soon After a Chapter 13 Bankruptcy Can You Buy a House?

Those who file for a Chapter 13 bankruptcy can buy a house anywhere from immediately to four years after the filing. The rules for how soon after a Chapter 13 bankruptcy can you buy a house are similar to those of a Chapter 7 bankruptcy.

  • Government-Backed Loans: If you are applying for an FHA or VA loan for buying a house after bankruptcy involving Chapter 13, you typically must wait up to 1 year. However, under certain circumstances with an FHA loan, you may have no waiting period.
  • Conventional Loans: If the court dismisses your bankruptcy, you are facing a 4-year waiting period for a conventional mortgage. If the court discharges your bankruptcy, you are facing at least a 2-year waiting period.

Chapter 7 Versus Chapter 13 Filings

A Chapter 7 bankruptcy is the most common type of filing. According to USCourts.gov, about 68% of people filing bankruptcy follow Chapter 7, while about 32% file under Chapter 13.

Chapter 7 discharges, or erases, the debts that qualify. Those who have a minimal number of assets and a low income usually have the most success with Chapter 7. With Chapter 13, debtors set up a repayment plan for at least a portion of their debts. This also works as a reorganization of the person’s debts. Those filing under Chapter 13 often will have an income level that’s too high for Chapter 7.

Rebuild Your Credit Before Applying for a Home Loan

While you may qualify for a home loan immediately after your bankruptcy filing, it may be in your best interest to wait at least two years to apply. Once you can show improved credit, you become eligible for more favorable loan terms. This significantly affects monthly payments on a mortgage. Even a small improvement in your interest rate means lower payments over the lifetime of the loan.

After bankruptcy, you can immediately take steps to rebuild your credit. Two good ways to do this are:

  • Secured Credit Card: A secured credit card receives backing from your own savings account. Rather than missing payments, credit card bill payments come from the savings account balance. This gives the lender collateral against your loan. Make sure your secured credit card activity reports go to credit agencies, allowing you to demonstrate you are reliable and creditworthy, rebuilding your credit score.
  • Installment Loan: A short-term loan to pay off the purchase of a vehicle or a similar item is another way to improve your credit. Your initial interest rate might be high, but the payoff in a higher credit score may be worth it.

Can You Buy a House After a Bankruptcy Sooner Than After a Foreclosure?

Note that post-bankruptcy mortgage waiting periods are much shorter than what typically occurs after a home foreclosure. The foreclosure may involve a seven-year wait. For this reason, a bankruptcy may be preferable to foreclosure in many cases. If you are discharging mortgage debt in bankruptcy, the credit hit will generally show up as a bankruptcy rather than a foreclosure or a short sale.

Bunch & Brock Is Ready to Answer Your Bankruptcy Questions

Buying a house after bankruptcy can be a challenge. But it becomes a far bigger challenge when you fail to properly complete the bankruptcy filing process. Our personal bankruptcy attorneys are available to guide you through the process of filing for bankruptcy, protecting your hopes for your financial future, including purchasing a house.

For help with any and all Chapter 7, Chapter 13, or business bankruptcy questions and concerns, please don’t hesitate to contact the Kentucky bankruptcy attorneys at Bunch & Brock. Call us as soon as possible at 859-254-5522 for a consultation about your situation.

Attorney Caryn L. Belobraidich

Attorney Caryn L. Belobraidich has handled Chapter 7 liquidation bankruptcies for individuals and businesses and Chapter 13 reorganizations for twenty years. She graduated from the University of Wisconsin-Madison and went on to get her J.D. degree at Thomas Cooley Law School in Lansing, Michigan. Caryn tries to make the bankruptcy process as pleasant as possible for all of her clients. [ Attorney Bio ]