For many people, the thought of buying a house after bankruptcy is one of the reasons why they want to avoid filing for relief from their debts. They assume that once they file bankruptcy they will not be able to obtain any type of credit, including a mortgage, because of the bankruptcy. Unfortunately, this fear keeps some people from filing a bankruptcy case or delays the decision to file bankruptcy until matters are much worse. The bankruptcy myth that a debtor will never qualify to buy a house after bankruptcy is simply that — a myth.
Qualifying for a Mortgage After Bankruptcy
If you are worried about buying a house after bankruptcy, put those worries aside. Debtors may be required to wait two years or so after filing bankruptcy before he or she can qualify for a conventional mortgage; however, debtors can use that time to their advantage. Saving money for a down payment, developing and living within a budget, and working to improve credit ratings are a few of the steps debtors can take while they are preparing to buy a house after bankruptcy.
Your financial life will not end after filing bankruptcy. You can own a home, buy a new car, take vacations, and obtain credit if you choose to do so. Buying a house after bankruptcy is not impossible; however, when you are eligible to qualify for a mortgage depends largely on the type of mortgage you are applying for and the chapter of bankruptcy you filed.
Mortgage Companies and Bankruptcy
Lenders have different regulations and rules regarding the amount of time you must wait between filing bankruptcy and qualifying for a mortgage. Some lenders have internal standards in addition to the mortgage industry standards that they follow regarding buying a house after bankruptcy.
Below is a summary of how long you must wait after your bankruptcy case is closed to be eligible to qualify for various types of mortgages.
- Conventional Home Loans – A conventional home loan backed by Fannie Mae is one of the most popular types of mortgage loans. If you filed a Chapter 7 bankruptcy, you must wait four years after the date of discharge to qualify for a Fannie Mae loan; however, the waiting period after a Chapter 13 discharge is only two years.
- Federal Housing Administration Loans – The time between a bankruptcy discharge and qualifying for an FHA loan is shorter than a loan backed by Fannie Mae. For a Chapter 7 case, the time is two years from the date of discharge and only one year from the date of discharge for a Chapter 13 case.
- Veterans Administration Loans – The time between the date of discharge and being eligible to qualify for a VA loan is the same as for an FHA loan. Two years for a Chapter 7 case and one year for a Chapter 13 case.
- USDA Loans – If you are applying for a USDA loan, the time between a Chapter 13 case and being eligible to qualify for a USDA loan is one year just like an FHA loan or a VA loan. However, you must wait three years after a Chapter 7 discharge to be eligible to qualify for a USDA loan.
What About a Subprime Loan?
Some individuals who are buying a house after bankruptcy apply for a subprime loan because those loans are not backed by the government. While a subprime loan may be easier and quicker to obtain, these loans have higher interest rates and closing costs. Subprime lenders typically require a larger down payment. In most cases, if debtors wait the required time to obtain a conventional loan, they will be in a better financial position in the long-term.
Bankruptcy and Your Credit Rating
Bankruptcy can positively affect your credit score and actually may make it easier to find a lender than before you filed for a bankruptcy case. Prior to bankruptcy, you were trying to pay debts that you could not afford. Those debts are now discharged giving you more money each month to pay a mortgage payment. This financial situation looks more positive to a lender than your financial situation prior to your bankruptcy. Lenders look at debt-to-income ratio as a factor when deciding whether to approve a mortgage loan. Your debt-to-income ratio is lower now that you have filed bankruptcy and discharged most, if not all, of your debt.
Furthermore, your bankruptcy case helps to clean up your credit history by discharging debts that are the subject of outstanding collections and prevents creditors from continuing to add negative information to your credit report. It is true that a bankruptcy filing will cause a temporary decrease in your credit score; however, most debtors see their credit score increase within a year or two after completing bankruptcy. This corresponds with most of the waiting periods to be eligible to qualify for conventional loans.
If you have more questions about buying a house after bankruptcy, take advantage of a free bankruptcy consultation. We will not only cover this concern, but any other that you may have about filing a bankruptcy case.