Buying a House After Bankruptcy

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Written By Alina Sokirko

Going through bankruptcy may feel like your chances of getting a loan are ruined because it will inevitably impact your credit and drain your finances. However, there is always hope for redemption as long as you get back on track and change any bad habits.

Buying a home after a bankruptcy isn’t easy, but it is possible as long as you wait the proper amount of time and take the necessary steps to improve your finances. Here is a look at how to buy a home after bankruptcy.

Can You Buy a House After Bankruptcy? 

Yes, you can buy a house after bankruptcy, but it may be challenging. If you are paying cash, then the process will be more straightforward. But if you have to apply for a mortgage, you’ll be required to wait until a judge discharges the bankruptcy. The amount of time this will take depends on what type of bankruptcy you filed.

Buying a House After Chapter 7 Bankruptcy

Chapter 7 bankruptcy is when the court allows you to walk away from most of your unsecured debt and stops creditors from harassing you for payment. Also known as liquidation bankruptcy, filing for chapter 7 will eliminate the most common forms of debt, such as credit cards, medical bills, and personal loans. You can still apply for a mortgage after declaring Chapter 7 bankruptcy, but you’ll have to wait several years after its discharge to be approved.

Buying a House After Chapter 13 Bankruptcy

Chapter 13 bankruptcy is a bit less severe. During this type of bankruptcy proceeding, the court will allow you to restructure your debts rather than eliminate them and create a new payment schedule that is more manageable. So, it won’t hurt your credit as much as filing chapter 7, and you’ll get to keep your assets. It may be a bit easier to be approved for a mortgage with a chapter 13 filing compared to a chapter 7. But you’ll have to pay off your other debts first and abide by the court’s ruling.

How to Buy a House After Bankruptcy 

Step 1: Work on Your Credit

The first step is to work on your credit. Although you won’t be able to reverse the effects of the bankruptcy overnight, you can work on rebuilding your credit as much as possible to improve your chances of approval. Common tactics to improve your credit after bankruptcy include:

  • Opening a secured credit card.
  • Paying your bills on time.
  • Paying off any additional debt as soon as possible.

Step 2: Prepare Your Letter of Explanation

A letter of explanation can also help improve your chances of approval. If there were extenuating circumstances beyond your control that put you in a bad financial situation, you could attempt to explain them in this letter. A letter of explanation is an excellent way to demonstrate that you’ve addressed any problems and are committed to making better financial decisions.  

Step 3: Find a Lender and Seek Pre-Approval

Once you’ve rebuilt your credit as much as possible and waited the appropriate amount of time, you should reach out a seek lender approval. Government-backed loan programs tend to be more lenient than conventional loans to those with lower credit. But either is a possibility. Once you’ve found a lender willing to work with you, just submit the necessary financial documents and wait for your pre-approval letter.

Step 4: Look for a Home

Once you’re preapproved, the hard part is over. You can now start looking for a home with the confidence that you have the backing of a lender. Just don’t make any impulsive purchases or rash financial decisions because you could still be denied or hit with a higher rate if your credit changes between the time you are preapproved and the actual underwriting process.  

How Soon Can You Buy a House After Bankruptcy?

Chapter 7

You must wait at least four years after the court discharges your bankruptcy to apply for a conventional loan. To qualify for a USDA loan, you must wait about three years. With a VA or FHA loan, you must wait at least two years. But, to qualify for one of these loans, you must also have a credit score above a certain threshold. So you’ll also have to make sure you meet the credit requirements before you apply. 

Chapter 13

With chapter 13 bankruptcy, it’s a bit less cut and dry. It all depends on how the court rules and how they choose to handle the bankruptcy. Usually, they will put you on a 3-5-year payment plan to take care of your existing debts. You will need either a discharge or a dismissal from the court to apply for another loan. So, it’s best to focus on taking care of your existing debts and doing whatever possible to improve your credit score in the meantime.

Buying a House After Bankruptcy Bottom Line 

While it’s not easy to buy a house after going through bankruptcy, it’s doable if you are willing to put in the effort. As long as you can show that you’ve recognized the problem and taken the appropriate steps to improve your financial situation, you will eventually find a lender willing to give you a mortgage. 

Also, keep in mind that a chapter 7 bankruptcy will be removed from your credit report after about ten years, and a chapter 13 will disappear after about seven. So, if you can be patient, eventually, you will get a fresh start. But even if you can’t wait that long, just put in the effort to make better financial decisions, and eventually, you’ll be able to get a mortgage.