Can You Buy a Home After Bankruptcy?

Bankruptcy can have lasting negative effects on your finances and can feel impossible to bounce back from. But if you want to buy a home and a bankruptcy filing is still lingering on your credit report, you may not be completely out of luck. 

Some lenders have mortgage solutions that may be available to you, even if it’s only been one or two years. But, again, it depends on the type of bankruptcy filed and the loan program you select.

How Does Bankruptcy Affect Your Mortgage?

If the bankruptcy is only a few years old, chances are your credit score is on the lower end. Even if it’s high enough to qualify for a home loan, you could get a steep interest rate since the risk of default is higher.

Is It Possible to Buy a Home After Bankruptcy?

In short, yes, it is possible to buy a house after bankruptcy. However, the waiting period depends on the type of bankruptcy you filed and the home loan you’re pursuing.

Chapter 7

You can get a mortgage between one and four years following the discharge or dismissal of a Chapter 7 bankruptcy filing. But, again, it depends on the type of home loan you’re applying for. 

Chapter 13

There’s a bit more leniency with Chapter 13 bankruptcy filings. It’s possible to secure a mortgage as soon as one year, although most home loan products have a waiting period of two or four years.

What Types of Mortgages Can You Get After Bankruptcy?

You may be eligible for a conventional mortgage or government-backed loan after bankruptcy. There are also non-conforming mortgage products available through private lenders, like Angel Oak Home Loans, that could be a good fit for you. More on those shortly.

How Soon Can You Get a Home After Bankruptcy?

Below is a breakdown of the waiting periods following bankruptcy by mortgage type. You’ll also find exceptions to the rules, referred to as extenuating circumstances contributing to your bankruptcy filing, that could make the mandatory waiting period shorter. For the latter, they’re typically occurrences that are isolated events beyond your control. 

FHA Loans

• Chapter 7 Bankruptcy: two years from the date of dismissal or discharge 
• Chapter 13 Bankruptcy: no waiting period if the court has discharged or dismissed the bankruptcy 
• Extenuating Circumstances: an economic event resulting in a reduction of at least 20 percent of your household income for six or more months

VA Loans

• Chapter 7 Bankruptcy: two years from the date of dismissal or discharge 
• Chapter 13 Bankruptcy: no waiting period if the court has discharged or dismissed the bankruptcy 
• Extenuating Circumstances: lengthy labor strikes or periods of unemployment along with medical expenses you were forced to pay out of pocket as the services or medications rendered weren’t covered by your health insurance policy

USDA Loans

• Chapter 7 Bankruptcy: three years from the date of dismissal or discharge 
• Chapter 13 Bankruptcy: one-year waiting period (dismissals and discharges) 
• Extenuating Circumstances: layoffs, reduced benefits, medical issues or payment disputes as they relate to services or goods you purchased that were defective

Conventional Loans

• Chapter 7 Bankruptcy: four years from the date of dismissal or discharge 
• Chapter 13 Bankruptcy: four years from the date of dismissal (if your bankruptcy is dismissed) or four years from the filing date and two years from the date of dismissal (If your bankruptcy is discharged) 
• Extenuating Circumstances: non-recurring events, like hits to your income, unemployment, medical conditions and divorce

Tips to Buy a Home After a Bankruptcy

You’ll likely have to wait a bit following your bankruptcy to purchase another home. However, there are tips you can follow to get prepared in the meantime and help make the process more seamless when the time comes to apply for a home loan.

Rebuild Your Credit and Monitor Your Credit Reports

When you filed for bankruptcy, your credit score likely took a huge hit. But it’s possible to start building it back up, and it helps to understand how FICO scores are calculated, so you’ll know how your debts impact your credit score. 

This credit-scoring model is used by 90 percent of creditors to make lending decisions. FICO scores range from 300 to 850 – the higher, the better – and are calculated as follows: 

• Payment history: 35 percent of your FICO score
• Amounts owed: 30 percent of your FICO score
• Length of credit history: 15 percent of your FICO score 
• Credit mix: 10 percent of your FICO score
• New credit: 10 percent of your FICO score

There’s also VantageScore, that’s slowly rising in popularity. The score range is the same, but the way your score is calculated is slightly different: 

• Total credit usage, balance and available credit: Extremely influential to your VantageScore 
• Credit mix and experience: Highly influential to your VantageScore
• Payment history: Moderately influential to your VantageScore
• Credit history and credit age: Less influential to your VantageScore
• Recently opened accounts: Less influential to your VantageScore

To start rebuilding credit, add positive payment history to your credit report by making timely payments on all your current debt obligations and other bills to keep collections off your credit profile. You can also get a secured credit card to help you get back on track. In addition, you’ll need to make a security deposit, which is typically equivalent to the credit limit. But remember to make timely payments each month on or before the due date and keep the balance low to have the best shot at rebuilding your credit. 

(Quick note: Look beyond your FICO score to get a gauge for your credit health. Be sure to review your credit reports from the three major credit bureaus – Experian, TransUnion and Equifax – to confirm they’re free of errors that could be dragging your credit score down. If you spot any inaccuracies, file disputes promptly with the appropriate credit reporting agencies to have them rectified). 

Pay What You Owe on Time and Keep Your Debts to a Minimum

As mentioned above, payment history makes up 35 percent of the FICO credit-scoring model, which is used by 90 percent of creditors and lenders to make lending decisions. So, it’s vital to pay your bills on time. And if any accounts are past due, pay the delinquent balances as soon as possible or make arrangements with creditors to bring them current over time. 

It’s equally important to keep the balances on your revolving debts (or credit cards) low. Remember, your credit utilization, or the amount of available credit in use accounts for 30 percent of your FICO score. So ideally, you want to keep your utilization at or below 30 percent – 10 percent or lower is even better to help improve your credit score. Plus, a lower debt load equates to a lower debt-to-income (DTI) ratio, which could make it easier to qualify for a mortgage loan.

Understand How Your Credit Rating Impacts Borrowing Costs

The stronger your credit score, the more likely you are to receive a lower interest rate. That said, you’ll save a bundle in interest and get a more affordable monthly payment. 

Take a look at the average annual percentage rate (APR) and monthly payment on a $375,000, 30-year fixed loan by credit rating:

• 620 to 639: APR of 7.616 percent and $2,652 monthly payment
• 640 to 659: APR of 7.070 percent and $2,513 monthly payment
• 660 to 679: APR of 6.640 percent and $2,405 monthly payment
• 680 to 699: APR of 6.4246 percent and $2,352 monthly payment
• 700 to 759: APR of 6.249 percent and $2,309 monthly payment 
• 760 to 850: APR of 6.027 percent and $2,255 monthly payment 

Create a Spending Plan 

Navigating the bankruptcy process was likely challenging and overwhelming at times. But are you prepared to take the necessary steps, so history doesn’t repeat itself? A realistic budget is an ideal way to be proactive about your spending habits and overall financial health. 

It gives you a game plan for your income and makes it easier to stay on track and hit financial goals or targets. Furthermore, being more intentional with how you spend money also means you’re less likely to overspend on unnecessary items and get right back into debt. 

Opt for a Non-QM Loan

Consider a Non-QM Loan that isn’t backed by the federal government, as they generally have more flexible qualification criteria. For example, Angel Oak Home Loans, a full-service mortgage lender, offers a mortgage loan product that caters to borrowers with recent credit events. 

It’s called the Portfolio Select Home Loan and only requires a two-year waiting period following bankruptcy to be eligible for funding. Loan amounts range from $250,000 to $2.5 million. 

Inquire about this home loan product or others that may be available to you by completing the online form. 

Get Preapproved If You Can

Before formally applying, shop around to find reputable lenders. Once you have a short list, get preapproved to determine if you’re eligible for a mortgage and how much you qualify for. Doing so helps you compare home loan options to find the best fit. Plus, it makes your home search easier since you know how much the lender is willing to lend you, and it’s generally required when making an offer on a home in today’s competitive market. 

Include an Explanation in Writing

Draft up a letter explaining the circumstances surrounding your bankruptcy and how you’ve modified your behaviors or changed your financial situation to prevent history from repeating itself. A written explanation provides greater insight into your side of the story that led to the extenuating circumstances, and the underwriter may consider it when you apply for a mortgage.