If you've gone through bankruptcy, you're probably considering your new financial options and might be wondering whether homeownership is in the cards for you. Although it does take time and is difficult, it's not impossible to buy a house after declaring bankruptcy. The exact steps you need to take depend on what type of bankruptcy you filed. We'll walk you through the details and cover strategies that increase your chances of getting approved for a mortgage after bankruptcy.
How Long After Bankruptcy Can You Buy a House?
The bankruptcy process itself can take months or years to resolve. Generally, there's also a waiting period before you can purchase a house. The exact waiting period depends on whether you filed Chapter 7 or Chapter 13 and the type of home loan you're seeking.
Chapter 7 Bankruptcy Waiting Periods
Chapter 7 bankruptcy is sometimes called liquidation bankruptcy because the person's assets are sold to satisfy their creditors. Whatever debt remains is forgiven. If you've filed Chapter 7, your waiting period from the discharge date before buying a house varies by loan type.
- Conventional: Four years
- FHA or VA: Two years
- USDA: Three years
Waiting Periods for Multiple Bankruptcies
If you have multiple bankruptcies within the last seven years, you'll generally have to wait five years from the last discharge or dismissal before applying for a mortgage. One bankruptcy is already a red flag to lenders, so in their eyes, having multiple bankruptcies is all the more reason not to extend you credit.
Types of Mortgage Loans You Can Get After Bankruptcy
Once you've met the waiting period, you can apply for any kind of mortgage, such as a United States Department of Veterans Affairs (VA) loan, U.S. Department of Agriculture (USDA) loan, or conventional loan. That said, you might find it easiest to get a Federal Housing Administration (FHA) loan. Unlike conventional mortgages, FHA loans don't have as strict credit requirements.4 So, if your credit score is still a little lower than you'd like, you may have a better chance of qualifying for an FHA loan.
How to Apply for a Mortgage After Bankruptcy
When applying for a mortgage, there are a few additional steps that people with bankruptcies will likely need to take in order to get approved.
Step 1: Repair Your Credit
Building credit takes time, but the waiting period is a great opportunity to focus on your finances. Although bankruptcy will cause your credit score to drop, its effect on your score lessens over time. Before you start tackling your credit score, pull up your current credit report to check for errors and see where your score stands. If you spot mistakes, contact the credit bureaus to dispute them.
Your credit score could improve if you:
- Pay your bills on time every month
- Keep your credit utilization ratio low by not maxing out your credit cards
- Getting a secured credit card if you don't qualify for a standard unsecured credit card
Step 2: Write a Bankruptcy Explanation Letter
Your lender might request a letter from you explaining the circumstances that led to you filing for bankruptcy. This can help the underwriting department consider your situation.78
In the letter, describe what happened. Maybe you lost your job and didn't have income for an extended period of time, your spouse passed away and you couldn't manage your finances alone, or you had significant medical bills that caused you to fall behind on other debts
Conclude your letter by describing everything you've done since filing for bankruptcy to improve your financial situation. This can help the underwriters see that you're creditworthy.
Step 3: Get Pre-Approved
During the pre-approval process, you ask potential lenders to review your credit and income to determine if you qualify for a loan. If you do, the lender also will tell you how much of a loan the bank or issuer is willing to lend you.
To get pre-approval, reach out to a lender and provide your contact information, employment history, Social Security number (SSN), bank and investment details, and proof of income when prompted. You'll also typically have to give tax documents like returns, W-2s, and 1099s.
Step 4: Respond to Lender Inquiries
Since underwriting processes vary by lender, a potential lender might ask for more information after you submit your mortgage application. They might need more details in order to come to an approval decision, so it's in your best interest to respond to their request as quickly as possible. For example, a lender might ask you to send in an additional year of tax returns if you changed jobs or companies.
How Long Does It Take To Rebuild Credit After Bankruptcy?
The answer depends on your specific financial situation, but be aware that bankruptcy can stay on your credit report for up to 10 years.10 However, even though your credit may initially drop after filing, you may see your score improve within months, especially if you take steps to rebuild your credit.
What Is the Waiting Period After Bankruptcy?
The waiting period is the amount of time you have to wait after a bankruptcy discharge or dismissal before you can apply for a mortgage. The waiting period depends on what type of bankruptcy you file and what type of mortgage you're taking out.
What Is the Downside to an FHA Loan?
FHA loans face additional restrictions and regulations, which can slow down the homebuying process. Plus, if you're unable to make a 10% down payment, you're required to purchase mortgage insurance.11
U.S. Department of Housing and Urban Development. “Appendix 1.0 – Mortgage Insurance Premiums,” Page 1.
Unlike a conventional loan, an FHA loan requires you to pay mortgage insurance for the life of the loan, so it can cost you more in the long run.
The Bottom Line
Bankruptcy is never a decision to take lightly. If you have to file, you might face extra challenges in qualifying for a mortgage down the line, but it's still possible to buy a home. By using the required waiting time to improve your credit score, you can prove to lenders that you're responsible with your finances. You may also qualify for better interest rates if you can greatly improve your score. To help you come up with a post-bankruptcy recovery plan, you may want to speak with a financial advisor or credit counselor.
