September 10, 2024
Declaring bankruptcy, either Chapter 7 or Chapter 13, impacts your credit standing. Though it might be a necessary financial step, it disrupts your normal financial activities, including getting a mortgage. But is declaring bankruptcy the end of your ability to buy a new home?
Not necessarily.
Thanks to “seasoning periods” a borrower waits out after bankruptcy to be declared fit to borrow to buy a home, bankruptcy doesn’t permanently bar you from buying a home. Before discussing the waiting periods for mortgage loans, let’s differentiate between Chapter 7 and Chapter 13 bankruptcies:
Chapter 7 Bankruptcy
This involves liquidating your non-exempt assets to pay off creditors. While it provides a quicker resolution, it can negatively affect your credit score for up to a decade.
Chapter 13 Bankruptcy
This allows those with a steady income to create a court-approved repayment plan over several years. It’s generally considered less harmful to your credit score than Chapter 7.
Once you file for bankruptcy, adhering to the agreement’s terms is crucial for a successful discharge. After the discharge, a waiting period begins before you can apply for a new home loan.
Conventional Loans
These loans aren’t backed by the government and may have stricter eligibility requirements. For Chapter 7 Bankruptcy, you might need to wait at least four years after your bankruptcy discharge before applying for a conventional loan.
In Chapter 13 Bankruptcy, your waiting period is typically two years after discharge or four years from the filing date, whichever is longer.
FHA Loans
These loans, insured by the Federal Housing Administration, are designed to assist borrowers with lower credit scores and down payments.
The waiting period for an FHA loan is two years from the discharge date of a Chapter 7 Bankruptcy. With the court’s permission, you might be eligible for an FHA loan while still in an active Chapter 13 bankruptcy. Some borrowers might be allowed to apply one year after discharge.
Loan Approval After Bankruptcy
Higher post-bankruptcy credit scores improve your chances of getting a loan with favorable terms. Income and Employment: Lenders assess your income stability and employment history to ensure timely mortgage payments.
Working on your Debt-to-Income Ratio (DTI) is also good. DTI is the calculation that compares your monthly debt payments to your gross monthly income. Keep that number as low as you can.
With careful planning, qualifying for an FHA purchase loan after bankruptcy is possible.
Maintaining good credit scores, paying bills on time, and keeping your debt ratio low can help you achieve homeownership even after filing bankruptcy.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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