Last Updated on September 18, 2024 by Luke Feldbrugge
You went through bankruptcy and now are wondering, “Are there home loans for people who filed for bankruptcy?” First, we want to say nice work for taking initiative to check out this post. Second, yes, you can get a mortgage and buy a new home. However, there are certain requirements you need to meet. As you may already know, when you go through a bankruptcy it allows a fresh start, but generally speaking there are consequences you will need to overcome. In this post we look at home loans for people who filed bankruptcy, either Chapter 7 or Chapter 13, along with bankruptcy and buying a house. We also provide 6 ways you can improve your financial standing to help you to get it done.
Bankruptcy and Buying a House – Is it Possible?
Absolutely. But, first you must meet the requirements.
Securing a mortgage may present some challenges, but home loans for people who filed for bankruptcy do exist; and they include conventional and government-backed mortgages.
There are actually six different types of bankruptcy, but in this post we are only covering the two most common consumer bankruptcies that are typically addressed by home mortgage lenders. They are Chapter 7 and Chapter 13 bankruptcies.
One of the most important requirements to know when recovering from a Chapter 7 or Chapter 13 bankruptcy involves a waiting period. The waiting period typically lasts 2-4 years before mortgage lenders will consider a mortgage application.
During this time, to assist future home loan applications, the following are vitally important to address:
- Improve Your Credit Score – Most bankruptcy filings will drop one’s credit score below 600 and sometimes it can drop much lower. To potentially qualify for a mortgage, you will likely need a credit score of at least 580.
- Bankruptcy Discharge – Understand the specifics of your bankruptcy discharge
- Mortgage Requirements – Know everything a future lender will evaluate when you decide to pursue buying a home or qualifying for a mortgage
- Commit to Improving Your Financial Standing
Home Loans After Chapter 7 Discharge
Chapter 7 bankruptcy offers a clean slate by erasing qualifying debts, with an impact on credit reports for a decade. However, home buying isn’t off-limits for that duration. Many individuals can pursue homeownership within 2-4 years, depending on the mortgage type. The mortgage type is the second important factor to consider when looking to qualify for a home mortgage because they all have different requirements.
Lenders will likely impose a time period post-bankruptcy discharge before considering a mortgage application. Here are the typical time periods for different home loans for people who filed for Chapter 7 bankruptcy:
FHA Loan Requirements After Chapter 7
- Two year waiting period
- One-year with extenuating circumstances – see below
- 580 minimum credit score (500-579 may be permitted with a 10% down payment)
- 3.5% minimum down payment (likely 10% minimum if credit score is 500-579)
- May need permission from bankruptcy court to apply for a new mortgage if you are still paying your debt back
VA Loan Requirements After Chapter 7
- Two year waiting period
- No minimum credit score (many mortgage lenders will likely require a 620 minimum credit score)
- No minimum down payment required
- Must meet standard VA loan requirements
USDA Loan Requirements After Chapter 7
- Three year waiting period
- No minimum credit score (many mortgage lenders will likely require a 640 minimum credit score)
- No minimum down payment required
- Must be fixed-rate mortgage with 30-year term
- Also, USDA loans have income and location rules as well
Conventional Loan Requirements After Chapter 7
- 4 year waiting period
- 2 years from discharge date with extenuating circumstances
- Minimum credit score of 620
- 3% minimum down payment
- Must have re-established credit
Home loans after Chapter 7 are typically more of a challenging recovery than a Chapter 13 bankruptcy. That said, these are baseline time periods. Some lenders might have stricter requirements due to the nature of your Chapter 7 discharge.
Remember, the countdown starts upon the bankruptcy court’s discharge or dismissal of your case.
Buying a House After Chapter 13
Chapter 13 bankruptcy is typically viewed as more favorable for prospective homeowners that typically involve a structured debt repayment plan over 3-5 years. Post-plan, remaining eligible debts are discharged, with the bankruptcy noted on credit reports for seven years. Depending on the court’s decisions and the type of loan, homeownership could be possible even after a year.
Here are the typical time periods and requirements for different home mortgage types when looking at buying a house after Chapter 13 bankruptcy:
FHA Loan Requirements After Chapter 13
- One-year waiting period
- 580 minimum credit score (500-579 may be permitted with a 10% down payment)
- 3.5% minimum down payment (likely 10% minimum if credit score is 500-579)
- May need permission from bankruptcy court to apply for a new mortgage if you are still paying your debt back
VA Loan Requirements After Chapter 13
- One-year waiting period
- No minimum credit score (many mortgage lenders will likely require a 620 minimum credit score)
- No minimum down payment required
- Must meet standard VA loan requirements
USDA Loan Requirements After Chapter 13
- One-year waiting period
- No minimum credit score (many mortgage lenders will likely require a 640 minimum credit score)
- No minimum down payment required
- Must be fixed-rate mortgage with 30-year term
- Also, USDA loans have income and location rules as well
Conventional Loan Requirements After Chapter 13
- Two year waiting period from discharge date
- Four year waiting period from dismissal date
- Possibly 2 year waiting period with extenuating circumstances – see below
- Minimum credit score of 620
- 3% minimum down payment
- Must have re-established credit
Extenuating Circumstances May Receive Special Considerations
What are “extenuating circumstances”? Extenuating circumstances are unique, one-time events that fall outside the borrower’s influence; that lead to an abrupt and substantial decline in income; or an unexpected, severe rise in financial responsibilities.
Examples might include: the death of a wage earning spouse, a natural catastrophe, a severe medical issue that includes large medical bills, or an unexpected job loss.
In cases where the bankruptcy was due to extenuating circumstances, it’s possible to circumvent standard waiting periods. But, these considerations are loan-specific, require thorough documentation and a demonstration of financial stability post-event.
6 Ways to Improve Your Financial Standing
Buying a new home or getting a home loan for people who filed for bankruptcy is definitely challenging. But there are steps one can take to qualify for a future mortgage and purchase a home after waiting for the required time period. It requires a focused and disciplined approach to rebuilding your financial standing. The path to mortgage approval post-bankruptcy is paved with patience, disciplined planning, and strategic financial behavior. Here are six important ways to help you get there.
1) Re-establishing Creditworthiness
Your credit score is an important factor considered by lenders when you apply for a mortgage. Begin by reviewing your credit report from all three major credit bureaus: Equifax, Experian and TransUnion. Ensure the information is accurate, especially post-bankruptcy, as errors can further damage your credit. If you find inaccuracies, dispute them right away.
Then you need to work on rebuilding your credit. This can be done by obtaining a secured credit card, which may be backed by a deposit you make upfront. Use this card responsibly, making small purchases that you can pay off each month in full, and on time. This demonstrates to potential future home mortgage lenders that you’re managing your debt responsibly.
Additionally, if you have any remaining debts that weren’t discharged in bankruptcy, be diligent about making those payments on time.
2) Steady Income and Employment
You need a steady and stable source of income. Lenders want to see this. A consistent work history, ideally with the same employer or in the same industry, shows mortgage lenders that you have the means to make mortgage payments. If you’ve had to change jobs, try to stay within the same field to show continuity in your career. A steady job with a steady income goes a long way toward proving your financial stability.
3) Save for a Down Payment
Post-bankruptcy, it’s even more important to save for a substantial down payment. This accomplishes two things: it reduces the amount you need to borrow, and it shows lenders that you are financially responsible enough to save a significant amount of money. A larger down payment can also make you more attractive to lenders, because it reduces their risk.
4) Managing Your Debt-to-Income (DTI) Ratio
It’s important to keep your debt-to-income ratio low. This ratio is a comparison of your gross monthly income to your monthly debt obligations. Lenders use it to gauge whether you can afford to take on more debt. Pay down your existing debts and avoid taking on new debts. The lower your debt-to-income ratio, the more likely a lender will consider you for a mortgage.
5) Documentation and Explanation
When you’re ready to apply for a mortgage, you’ll need to provide extensive financial documentation. This includes tax returns, pay stubs, and bank statements. You should also be prepared to write a letter explaining the circumstances that led to your bankruptcy and how you’ve worked to remedy those issues. This letter can provide context to your credit report and give lenders insight into your financial reliability.
6) Consult with Professionals
Finally, consider consulting with a financial advisor. A financial advisor can help you develop a plan to improve your financial standing.
Improving your chances of mortgage approval after bankruptcy is about proving you have overcome past financial difficulties and are managing your finances well. It’s a journey that requires time and patience, but with a strategic approach, you can position yourself as a reliable candidate for a home loan and eventually purchase that new home.
Receive an Average of $3,000 from Homes for Heroes
After waiting the required time period following your bankruptcy discharge, and working to improve your financial standing in the areas noted above, our local Homes for Heroes mortgage specialist would be honored to speak with you about how we can help you get a mortgage to purchase your next home.
Homes for Heroes assists firefighters, EMS, law enforcement, active military and veterans, healthcare workers and teachers; buy, sell and refinance their home or mortgage. When you work with our local real estate and mortgage specialists to buy, sell or refinance; you receive significant savings after you close on a home or mortgage. We refer to these savings as Hero Rewards® savings, and the average amount received after closing on a home is $3,000, or $6,000 if you buy and sell!
Simply sign up to speak with a member of our team. There’s no obligation. After you sign up, they will contact you to ask a few questions and help you determine the appropriate next steps for you. When you’re ready, they will connect you with our local real estate and/or mortgage specialists in your area to assist you through every step and save you money when it’s all done.
It is how Homes for Heroes and our local specialists thank community heroes like you, for your dedicated and valuable service.
