Clients frequently ask about future credit after bankruptcy and especially about if they will ever be able to buy a home.
The answer to this question is not always as simple as it should be because it varies by the type of mortgage. This blog addresses special mortgages backed directly by the federal government such as FHA first time home buyer and rehabilitation loans. If you do not qualify for one of these loans, you should read our related blog on conventional mortgages about buying a home after bankruptcy.
The short answer is that a waiting period of one to three years after filing for bankruptcy is all that is required for FHA, Veterans Administration loans and US Department of Agriculture Rural Home Loans. But this is just as to the bankruptcy filing. Of course, you still need to take active steps after bankruptcy to rebuild your credit. Check out our blog posts on rebuilding your credit after bankruptcy
And, you have to have sufficient income and a good debt to income ratio to buy a house.
A Chapter 7 or Chapter 13 bankruptcy will show on your credit report for 10 years and negatively affect your credit. However, loans targeted to special populations and back by the federal government have rules that allow you to buy a home shortly after discharge. These rules are subject to change so we recommend that you consult a mortgage broker for the most up to date standards for qualifying.
Here are the waiting periods for these loans so you can buy a house. These waiting periods change over time and you will want to talk to your own mortgage broker or loan officer when you are ready to buy a home.
- If you otherwise qualify for a FHA loan, you must wait at least 2 years after a chapter 7 discharge or 1 year after a chapter 13 discharge.
- If you otherwise qualify for a VA loan, you must wait at least 2 years after a chapter 7 discharge or 1 year after a chapter 13 discharge.
- If you otherwise qualify for a USDA loan, you must wait at least 3 years after a chapter 7 discharge or 1 year after a chapter 13 discharge.
Conventional loans require a longer waiting period between bankruptcy discharge and requesting a home loan. These types of loans are not guaranteed by the federal government and can require significantly longer waiting periods.
In addition, if you are in a chapter 13 plan and you need to refinance to complete your plan, then FHA and VA can also help you. FHA loans used to refinance a home while in a chapter 13 bankruptcy require up to 2 years of on time payments to the chapter 13 trustee.
You must also meet the other loan standards such as sufficient income and appropriate loan to value ration. Also, the loan proceeds must allow you to conclude the financing required for your chapter 13 plan as of the closing of the loan. We sometimes call this buying out your plan. This can work well if you have the equity.
It is also possible to use VA loans to refinance a home while in a chapter 13 bankruptcy. You need up to 2 years of on time payments to the chapter 13 trustee and you must meet the other loan standards such as sufficient income. But you do not need to buy out your plan.
Filing bankruptcy is usually just the first step to rebuilding your credit and putting yourself back on track to possible home ownership in the future.