Buying a House after Chapter 7 Bankruptcy
January 11th, 2019 by Bunch & Brock
Once you have achieved a Chapter 7 bankruptcy discharge, it is time to look forward, where you’ll see opportunity ahead. You will be free of the burden of unmanageable debt — but 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 are surprised to learn they may qualify for a post-bankruptcy mortgage much sooner than expected.
Credit Issues After Chapter 7
A Chapter 7 bankruptcy will stay on your credit report for 10 years, with the information accessible to all banks and other potential lenders. This does not mean you are excluded from getting credit for 10 years, but you will be considered a credit risk, so may not be offered the most desirable rates and terms. 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 within two years.
Post-Bankruptcy Mortgage Loan Options
Depending upon your circumstance and the type of mortgage you may qualify for, you could obtain a loan within a year of your bankruptcy discharge date. This best-case-scenario applies to an FHA loan for borrowers who can show an extenuating condition as the cause of their bankruptcy. (For example, serious illness, death of a spouse, or natural disaster.)
In other cases, the following timelines apply to Chapter 7 bankruptcy filers:
FHA Loans – 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, but lack of credit will not eliminate you from consideration for a FHA loan.
VA Loans – A VA loan is also an option once you have passed the two-year waiting period after bankruptcy. Most VA lenders do require a minimum credit score of 620, so you will need to work on your credit before applying for a loan.
Conventional loans— 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 (although a private lender may make an exception in some cases). Under Fannie Mae guidelines, which most lenders follow, you would need to demonstrate clearly successful efforts to rebuild stable credit after your bankruptcy discharge.
Rebuild Credit, Then Apply
While you may qualify for a home loan earlier, it may be in your best interests to wait at least two years to apply. Once you can show improved credit, you become eligible for more favorable terms, which significantly affects monthly payments. 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 is backed by your own savings account. Any missed payments can be taken from the savings balance, providing the lender with collateral against your loan. (Make sure your secured credit card activity will be reported to credit agencies, allowing you to demonstrate you are reliable and creditworthy.)
- Installment Loan – A short-term loan to pay off the purchase of a vehicle or other item is another way to improve your credit. Your initial interest rate might be high, but the payoff in a raised credit score may be worth it.
Note that post-bankruptcy mortgage waiting periods are much shorter than is typical after a home foreclosure, which involves a seven-year wait. For this reason, a bankruptcy may be preferable to foreclosure in many cases. If mortgage debt is discharged in bankruptcy, the credit hit will generally show up as a bankruptcy rather than a foreclosure or short sale.
For help with any and all Chapter 7 questions and concerns, please don’t hesitate to contact the Kentucky bankruptcy attorneys at Bunch & Brock.