How To Buy A House After Bankruptcy
Miranda Crace7-minute read
July 10, 2019
*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.
While no one ever wants to go through bankruptcy, sometimes life happens, and debts can become too much. However, bankruptcy need not be a financial death sentence. You can get back on your feet and get a home down the line.
This post will go over the dynamics involved in buying a home after bankruptcy and how to prepare for that.
What’s The Difference Between A Bankruptcy And A Foreclosure?
There are some significant differences in how your home is handled in a bankruptcy versus a foreclosure, and some of them depend on what type of bankruptcy is declared.
A Chapter 13 bankruptcy reorganizes your debt and allows you to keep your house. Instead of giving up your property, you repay your creditors under a court-ordered payment plan. Once you’ve satisfied your obligations, the bankruptcy is discharged.
In a Chapter 7 bankruptcy, your debts are forgiven, but you have to surrender any property that was meant to secure those debts. For example, if you include your mortgage and auto loan in the bankruptcy filing, you will give up your home and your car.
If you surrender your house in a Chapter 7 bankruptcy, there’s a foreclosure process that your lender can go through to take possession of the property, but it’s not treated as a foreclosure. After the property is surrendered and transferred to a creditor, you’re no longer responsible for the debt.
By contrast, if your lender forecloses on your home for nonpayment of your mortgage but you haven’t declared bankruptcy, the debt is handled a bit differently.
In a traditional (non-bankruptcy) foreclosure, the lender takes possession of your home and sells it. There are differing levels of due process, and in some states, the foreclosure is handled through the judicial system, while in others, lenders can handle it outside the courts as long as they follow the requirements laid out in your mortgage documentation.
Regardless of how the lender comes to possess the property, the key difference between bankruptcy and foreclosure comes after the property is sold. Unlike in a Chapter 7 bankruptcy, in a foreclosure, if the lender or mortgage investor (Fannie Mae, Freddie Mac, FHA, etc.) is unable to sell the property for the mortgage balance, the lender or investor may be able to get a deficiency judgment.
A deficiency judgement would leave you responsible for the difference between the property’s final sale price and the outstanding balance on the mortgage. State policies vary.
Beyond differences in how the debt is handled, it’s often easier to get a mortgage after a bankruptcy. Because a foreclosure signals to lenders and investors that you walked away from your house in the past, you're a bigger risk, as you’re seen as more likely to walk away from future mortgages.
How Long After Bankruptcy Can I Buy A House?
The next natural question for you might be: How long after bankruptcy can you buy a house?
That depends on a variety of factors, including the type of bankruptcy and the mortgage investor associated with your loan. It’s worth shopping around because mortgage lenders may have their own options, but for the sake of this post, we’ll cover the most common options from the five biggest mortgage investors and our friends at Rocket Mortgage®.1
Before we go further, it’s important to note that you can’t get a new mortgage while you’re going through bankruptcy. All the options we’ll be talking about are available within a certain time frame after the bankruptcy has been either dismissed or discharged.
The following sections are organized by the type of bankruptcy you filed.
When most people think of bankruptcy, this is probably the one that comes to mind. If you go through this bankruptcy process, your credit will take a major hit, but you can have your debts wiped away.
If you’re looking to get a mortgage after a Chapter 7 bankruptcy, you have to wait 4 years after the bankruptcy is discharged or dismissed to get a conventional loan through Fannie Mae or Freddie Mac.
For a loan in a rural area through the USDA, you’ll have to wait 3 years after discharge or dismissal. The FHA and VA require that the bankruptcy be discharged or dismissed 2 years before you apply.
A Chapter 13 bankruptcy is a reorganization of debt. While lending standards are a little more lenient for this because you’re not totally walking away from the debt, it’s still serious.
The waiting period before you can get conventional loans can vary, depending on whether you had the bankruptcy discharged or dismissed. If it was discharged, the discharge has to be more than 2 years old, and you have to have filed for bankruptcy more than 4 years ago. If it was dismissed, the waiting period is 4 years from the time your credit is checked.
The USDA requires a waiting period of 1 year after discharge or dismissal prior to the loan application. The FHA and VA merely require that you have your Chapter 13 bankruptcy discharged or dismissed.
A Chapter 11 bankruptcy usually only applies to businesses with assets. However, if you’re self-employed and your business has been through Chapter 11 bankruptcy, it could affect the timing of your next mortgage.
For you to get a conventional loan, the bankruptcy would have had to have been discharged or dismissed more than 4 years prior to application. For the FHA, USDA or VA, just 2 years have to pass between discharge or dismissal and application.
If you’re a fisherman or farmer, you may be familiar with a Chapter 12 bankruptcy. It’s like a Chapter 13 bankruptcy in that it’s a debt reorganization, but there are additional features intended to help people in these lines of work. If you have any questions, consult a bankruptcy attorney.
The restrictions for getting a conventional loan are the same as those under Chapter 13. Bankruptcy would have to have been filed more than 4 years ago and discharged at least 2 years ago.
For USDA loans, the waiting period is at least a year after discharge or dismissal. The FHA and VA just want the bankruptcy discharged or dismissed before you apply.
How Do You Rebuild Your Credit After Bankruptcy?
The waiting period is just one thing to consider when looking to get a mortgage after bankruptcy. Bankruptcy has a major negative impact on your credit score immediately and stays on your credit report for a while.
As an example, Chapter 7 bankruptcies remain on your report for 10 years, while Chapter 13 bankruptcies stick for 7. As long as the bankruptcy remains on your record, it will have some detrimental effect on your FICO®credit score. However, the longer it’s been since your bankruptcy, the less impact the bankruptcy has.
It’s also important to look at what else is on your credit report.
If you’re on the way to financial stability after a bankruptcy, we invite you to check out our friends at Rocket HQSM. You can get your free VantageScore 3.0® credit score and report for free every week from TransUnion®. This is a free service and has no impact on your score. By signing up, you’ll get a look at your score as well as tips on how it can improve.
There are also some basic steps you can take to proactively rebuild your credit:
- Get reestablished: One very important thing to note is that when you declare bankruptcy, very often, your accounts may be completely wiped away. With that in mind, one thing you should try to do is responsibly reestablish credit as soon as possible. You may have to start over with a secured card or a credit-building personal loan from your bank. After some time, you can then work your way up to a car loan or a mortgage. It won’t happen overnight, but it can be done.
- Prioritize paying down debt: If you have debt left over after the bankruptcy, work toward paying it off. This will benefit you in a couple of ways. Your credit score will improve because this is an indicator that you’re moving in the right direction. Additionally, when it comes time to get a new mortgage, you’ll be able to qualify for a loan with a lower monthly debt-to-income ratio (DTI).
- Make timely payments: This seems basic, but it’s a huge part of your credit score and report. If you make your payments on time, it’s a big positive. Although you should always strive to make your payments on the due date to get into good habits and avoid late fees, there’s also a little bit of leeway if you’re waiting on a check. A payment isn’t reported as being late on your credit report until it’s overdue by 30 days or more.
To apply for certain loans, you may have to follow guidelines to show that you reestablished your credit after a bankruptcy. In addition to the waiting period to get a new loan, you may also have to have a letter explaining how the circumstances that factored into your bankruptcy have changed, why bankruptcy is unlikely in the future and what steps you’ve taken to prevent future financial trouble.
Both bankruptcy and getting a mortgage are significant financial events. Please consult a financial advisor if you have any questions or concerns.
Rocket Mortgage®, Rocket Homes Real Estate LLC and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.
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