If you recently filed for bankruptcy, you might be thinking that you can kiss your dream of one day becoming a homeowner goodbye. Well, we’ve got some good news for you: you’re wrong.
There are plenty of lenders who are willing to forgive bankruptcy filers. You can still qualify for a good loan with a solid interest rate.
Here’s what you should know about post-bankruptcy home loans.
How Long Will You Have To Wait?
Unsurprisingly, you can't just file for bankruptcy one day and apply for a mortgage the next — different types of loans and lenders have specific seasoning requirement following bankruptcy.
Typical Waiting Periods for Commonly Used Mortgages
- Conventional Loans: expect to wait up to four years before qualifying for a mortgage. That said, if you can prove your bankruptcy filing was due to elements outside your control (spousal death, house fire, etc), you might be able to qualify in two.
- Federal Housing Authority (FHA) Loans: the typical waiting period is about one to two years.
- Veterans Affairs (VA) Loans: the typical waiting period is approximately one year.
How Does Bankruptcy Affect Your Ability to Qualify for a Mortgage?
Your credit score reflects your riskiness to banks. The higher your credit score, the less of a risk you are. The lower your credit score, the riskier you look to the banks.
Bankruptcy might stay on your credit report anywhere from 7 to 10 years after the filing date, and it's very likely that it will severely negatively impact your credit score. If you have a bad credit score, you'll only be able to find mortgages with high interest rates and high premiums.
Bankruptcy affects your ability to qualify for a mortgage by negatively impacting your credit score.
Read More: How to Fix Your Credit Score in 6 Months
Chapter 7 Bankruptcy
First, we'll focus on the "traditional bankruptcy," Chapter 7, "Discharge of Debts," because it's the most common.
If you’ve filed Chapter 7, your best bet at securing financing and becoming a homeowner is probably going to be a FHA loan.
FHA loans require lower down payments and lower credit scores, which is important for someone with a credit score recovering from bankruptcy.
You have two options: attempt to rebuild your credit over time by opening a credit card and staying up to date with the payments or, alternatively, refuse to open any new credit lines at all. The FHA will accept either.
Since the average American household has about $7,000 of revolving credit card debt, it might be a good idea to avoid opening a new line of credit rather than trying to rebuild your score over time.
After the waiting period, you can apply for a FHA loan with as little as 3.5% down.
Chapter 13 Bankruptcy
Since Chapter 13 is a multi-year process, you'll actually still be able to buy a house in the middle of making payments. The requirements to qualify for an FHA loan are:
- You can demonstrate responsibility in keeping up to date with your payments.
- The court agrees to grant you an FHA loan.
- You've paid 12 months of the repayment plan.
Conventional loans aren't insured by the FHA, so they usually require a higher credit score and more money down.
That means you're not going to qualify for a conventional loan as quickly as you might qualify for FHA.
When you purchase a home using a conventional loan, you'll have to pay private mortgage insurance. This protects the lender in case you default.
Once you reach a loan-to-value ratio of about 78%, however, you won't have to make PMI payments anymore.
Still, expect to wait about four years before you can qualify for a conventional loan.
How Can You Learn More?
If you want to learn more about real estate financing following a bankruptcy, the right real estate agent can answer all of your questions.
A good real estate will guide you through the real estate sales process, from house-hunting and securing a loan to negotiations and closing.
What’s more, when you team up with one of Clever’s top-rated Partner Agents, you can qualify for a Home Buyer Rebate, which puts up to 1% of the final purchase price back in your pocket.
Those savings can be applied towards closing costs, mortgage payments, insurance premiums, moving expenses, and more.
If you’d like to learn more, fill out our online form — a Clever representative will reach out to answer any questions you might have and connect you with a top-rated, full-service buyer’s agent in your area for a no-obligation consultation.