One of many reasons that relatively young adults resist filing for bankruptcy even when they’re drowning in debt is the fear that it will derail their dreams of one day buying a home. That’s not the case at all. If you continue in a debt spiral, you’re most certainly not going to be able to get a mortgage.
If you file for Chapter 7 bankruptcy, it won’t prevent you from qualifying for a mortgage. You will, however, have to be patient. Let’s look at a few things you should know.
The length of time you need to wait depends on the type of mortgage
None of the government mortgage agencies will approve a home loan for the first two years after a Chapter 7 bankruptcy. After that, you may qualify for a Federal Housing Administration (FHA) or Veterans Affairs (VA) mortgage. It takes a year longer for a U.S. Department of Agriculture (USDA) mortgage. After four years, you may be able to get approved for a conventional mortgage (through Fannie Mae or Freddie Mac).
Note that other factors will be considered. For example, your credit score should be showing improvement. It’s typically best to get some limited new credit products, but you shouldn’t take on considerable new debt if you want to be approved for a mortgage. Each type of government and conventional mortgage lender has its own minimum credit score, down payment and other requirements.
Are there extenuating circumstances?
Mortgage programs make exceptions to their post-bankruptcy waiting periods for extenuating circumstances that led to the bankruptcy. These vary by program, but include:
- Job loss
- Injury or illness (and associated medical bills)
- Labor strike
In some cases, extenuating circumstances are defined more broadly. For example, Freddie Mac defines them as “factors clearly beyond the control of the borrower.”
There’s a lot more to know about how best to maintain your dream of buying a home after bankruptcy – whether you file for Chapter 7 or Chapter 13. It helps to have sound legal guidance throughout the bankruptcy process.