Buying a house after bankruptcy: Chapter 7 and Chapter 13 rules

Can I buy a house after bankruptcy?

If you had a bankruptcy discharged in the past, you might be thinking about buying a house. The good news is that it’s possible to purchase a home following a Chapter 7 or Chapter 13 bankruptcy. But there’s usually a waiting period of 2-4 years before you can take out a mortgage.

Lenders will look closely at your credit score, credit reports, bankruptcy discharge details, and other factors to ensure you qualify. Tread carefully after bankruptcy and take steps to improve your credit. With hard work and patience, you’ll eventually be able to get a home loan.

In this article (Skip to...)

• Overview
• Buying after Chapter 7
• Buying 1 year after Chapter 7
• Rules by loan type
• FHA loans
• Applying after bankruptcy
• Tips to qualify
• FAQ

Is buying a house after bankruptcy possible?

Yes, you can buy a house after bankruptcy. If you’re not paying cash upfront for a new home, borrowing from a mortgage lender can be challenging. But it’s not impossible. Conventional loan programs and government-backed mortgages have processes in place to help bankruptcy filers recover from their financial missteps and become homeowners again.

Buying a house after Chapter 7

Chapter 7 is the most common type of bankruptcy. When you file for chapter 7, a bankruptcy court wipes out all of your qualifying debts. Chapter 7 filers can expect the bankruptcy to remain on their credit report for 10 years. However, you don’t need to wait a decade before buying a home. Depending on the type of mortgage, many filers only wait 2-4 years to buy a house after Chapter 7 bankruptcy.

Buying a house after Chapter 13

For the most part, it’s easier to buy a home after Chapter 13 bankruptcy than Chapter 7. Rather than all debt being discharged, Chapter 13 bankruptcy puts filers on a 3-5 year debt repayment plan. Afterward, the bankruptcy court discharges any remaining eligible debts. A chapter 13 bankruptcy will remain on your credit reports for seven years.

The amount of time you’ll need to wait before buying a home varies depending on how the court decides to manage your bankruptcy and whether or not it dismisses or discharges your debt. You may even qualify for an FHA, VA, or USDA loan after 12 months. Although, you’ll need to wait at least two years before securing a conventional loan.

How long after Chapter 7 do you have to wait to buy a house?

After a bankruptcy is discharged, it will take time to build your credit and savings back up to home-buying level. Mortgage lenders will want to know your financial situation has fully recovered and that you’ll be able to manage on-time payments with a new mortgage.

As such, lenders enforce a minimum waiting period or “seasoning period” before borrowers can apply for a mortgage after bankruptcy. The minimum waiting periods to get a mortgage after Chapter 7 are as follows:

• FHA loans: Two years
• VA loans: Two years
• USDA loans: Three years
• Conventional loans: Four years

These waiting periods are the minimum required by each loan program, and lenders may set stricter guidelines if they choose. For example, some lenders will ask you to wait three years before applying for an FHA loan, rather than the two-year minimum required by the Federal Housing Administration.

Understand that the waiting periods after Chapter 7 bankruptcy don't start until a bankruptcy court discharges or dismisses your bankruptcy. That’s at the end of the bankruptcy proceedings — typically 4-6 months after you first file.

If you’re counting down the days until you can buy a house after bankruptcy, be sure to start your calendar on the correct date — of the discharge or dismissal — because it will make a big difference in when you hit the two-year mark.

Can I buy a house 1 year after Chapter 7 discharge?

In most cases, there’s at least a two-year waiting period after your Chapter 7 discharge date until you can be approved for a home loan.

“There are some limited circumstances in which you can obtain a loan after one year from the discharge,” explains Andrea Puricelli, production resources engagement manager for Inlanta Mortgage. “But that’s only if the bankruptcy was caused by extenuating circumstances beyond your control, and you’ve since exhibited an ability to manage your financial affairs responsibly.”

“Extenuating circumstances” could apply if you were forced into bankruptcy due to medical bills from a serious illness, or a major job loss or income reduction.

In most cases, though, it takes more than a year to recover after declaring bankruptcy. So most home buyers will have to wait two years or more before buying real estate. Take this time to get your credit score as high as possible and save for a bigger down payment. Both strategies will help you get a lower mortgage rate and a more affordable home loan when you do buy.

Extenuating circumstances

You may be able to skip the long Chapter 7 waiting period if your bankruptcy was caused by an event outside your control. But keep in mind that each loan program has its own guidelines for what life events qualify as “extenuating circumstances.” So it’s important to speak with your bankruptcy attorney to ensure that you have a clear picture of whether or not your financial situation is eligible.

• Conventional loans: Fannie Mae defines an extenuating circumstance as any nonrecurring event that causes “a sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligations” This could include job loss, extended unemployment, divorce, or medical expenses from disability or illness. On the other hand, Freddie Mac has a broader definition of “factors clearly beyond the control of the borrower”
• FHA loans: Any event that reduced your household income by 20% or more for at least six months is considered an eligible circumstance by the FHA
• VA loans: Extenuating circumstances include events such as unemployment or uncovered medical bills. Note that divorce is not permitted under VA rules
• USDA loans: Qualifying circumstances are limited to those that were beyond your control and are not likely to happen again. This could include a loss of employment or a reduction or cessation of government-issued benefits

If any of these applies to you, be ready to thoroughly document the event that led to your bankruptcy and show how you’ve solved for it. The lender will want to be sure that nothing similar is going to happen in the future.

Mortgage after bankruptcy: Rules by loan type

If you’ve filed for Chapter 7 or Chapter 13, you’re still eligible for a broad portfolio of home loans. There aren’t any “bankruptcy rules” preventing you from getting a mortgage ever again. You’ll need to observe mandatory waiting periods and meet any loan requirements that are normally in place. In addition, certain loan products will be easier to qualify for than others.

• Conventional mortgage: Waiting period of four years, but 3% down payment and 620 minimum credit score. You can usually stop paying mortgage insurance (PMI) once you reach 20% home equity
• FHA mortgage: This loan type is likely more attainable for buyers with a Chapter 7 bankruptcy in their credit history. Popular with first-time home buyers, it features 3.5% down payment and 580 credit requirement. But you’re on the hook for mortgage insurance premiums (MIP) for the entire loan term, unless you refinance to a different type of mortgage, move, or pay off your loan
• VA mortgage: The Department of Veterans Affairs requires a minimum waiting period of two years from the date of your Chapter 7 discharge. To qualify for a VA home loan, you need to be an eligible veteran, service member, or member of an associated group (including some spouses)
• USDA mortgage: The waiting period is three years, with some exceptions based on the bankruptcy filing. This type of loan generally requires a minimum credit score of 640 or higher to buy homes in eligible rural areas

As always, the right loan type for you will depend on your financial situation and the home you’re buying. But for many borrowers with past credit issues, an FHA loan could be the right solution.

FHA loans after Chapter 7 bankruptcy

Fortunately, you can qualify for an FHA loan following Chapter 7. But be prepared to wait a while before you’ll get approved.

“Bankruptcy will not stop you from making a large purchase, like a home, in the future. So yes, it is possible to obtain an FHA home loan after Chapter 7 bankruptcy,” says Jeremiah Heck, a debt and bankruptcy attorney. “Typically, you have to wait for a minimum of two years after your bankruptcy is approved by the courts to be eligible.”

In some cases, the mortgage lender may require additional time. “For instance, some banks tend to ask potential borrowers who filed Chapter 7 bankruptcy to wait a total of three years before they are eligible,” adds Heck.

In addition to the waiting period, you’ll need to meet other FHA loan requirements. These typically include:

• Credit requirement of at least 580
• Down payment of 3.5% or more
• Debt-to-income ratio below 50%
• Steady income and employment
• Income source expected to continue for three years

Avoiding any new debts after bankruptcy — for example, a car loan or personal loan — can help your chances of qualifying for an FHA mortgage once the two-year waiting period is over.

How to apply for a mortgage after bankruptcy

The mortgage application process is largely the same for Chapter 7 filers as for any other home buyer. But there are a few extra steps you’ll likely want to take before trying to buy a house.

• Improve your credit score. We dive into this step in more detail below, but bankruptcy is a blemish on your credit history, and one that you need to address before even considering homeownership. Improving your credit may take time. And, doing so can significantly increase the length of time you’ll need to wait to buy a home
• Write a letter of explanation. Writing a letter that explains your bankruptcy gives you an opportunity to address any red flags on your mortgage application. Include details about why you filed for bankruptcy and how your personal finances have improved. Also, explain the steps you’re taking to ensure bankruptcy never happens again
• Get mortgage preapproval. Getting preapproved for a mortgage shows sellers and real estate agents that a lender has confirmed your ability to secure a mortgage. It will also reassure you of your home buying eligibility and establish your budget

Keep in mind that a bankruptcy filing stays on your credit reports for 7-10 years. Even after you become mortgage-eligible, your lender may still require legal documentation from the bankruptcy court to verify your status when you apply.

“This doesn’t hinder your ability to buy a home. But it’s realistic to acknowledge that a lender is going to consider that fact when reviewing your loan request,” cautions Heck. “My suggestion is to expect 2-3 years to rebuild your financial health following a bankruptcy.”

How to improve your chances of buying a house after bankruptcy

To get approved for any type of mortgage loan after bankruptcy, you need to demonstrate to lenders that you can manage your finances responsibly and that you will be able to reliably make mortgage payments. “That will require establishing good credit habits and ensuring that you’re not over-utilizing credit,” says Puricelli.

To rebuild bad credit more quickly, follow these tips:

• Pay all your bills on time and in full
• Check your free credit reports with the three major credit bureaus often and dispute anything inaccurate
• Don’t take on unsecured debt, like personal loans or credit cards, which will most likely come with high interest rates
• Get a secure line of credit, such as a secured credit card, that is backed with a deposit you pay beforehand

Having a friend or relative cosign on new credit lines can also help you qualify more easily and start building new credit. But this strategy comes with a lot of risk, because the co-signer is agreeing to take over your new debts if you can’t pay them. And if the loan goes bad, their credit will take a hit, too.

Is it hard to buy a house after bankruptcy?

“Getting a loan will be very difficult for a few years immediately following a bankruptcy,” says Reggie Graham, branch manager for Silverton Mortgage. He notes that home buyers applying after Chapter 7 and Chapter 13 bankruptcy can often expect bigger down payment requirements and higher interest rates.

“Your focus should be on rebuilding your credit to prepare for applying for a mortgage loan when you’re ready,” says Graham.

He also suggests the wait time to buy a home may be shorter if you file a Chapter 13 bankruptcy rather than Chapter 7. “Chapter 13 involves paying back an agreed-upon portion of your debt, which lenders look more kindly upon,” Graham explains.

Buying a house after Chapter 7 bankruptcy: FAQ

Check your home buying eligibility

Having a bankruptcy in your credit file shouldn’t stop you from buying or refinancing a home. Typically, home buyers applying after Chapter 7 bankruptcy will be charged higher interest rates. But shopping around could help you get a fair deal on your home loan.

If you’re thinking about homeownership, check with a few mortgage lenders to verify your home loan eligibility and find out what rates you qualify for. If you’ve been doing the hard work of rebuilding your financial life, you may be able to get a mortgage sooner than you think.