Buying a house after Chapter 7 bankruptcy

If you had a bankruptcy discharged a year ago or more, you might be starting to get your finances back in order. Maybe you’re even thinking about buying a house. 

The good news is that it’s possible to purchase a home following a Chapter 7 or Chapter 13 bankruptcy.

But there’s a waiting period before you can take out a mortgage — usually at least two years. And lenders will be looking closely at your credit score, credit reports, bankruptcy discharge details, and other factors to ensure you qualify.

Tread carefully after bankruptcy and take steps to improve your credit. With hard work and patience, you’ll eventually be able to get a home loan.

In this article (Skip to…)

• Waiting periods to buy a house after Chapter 7
• Can I buy a house 1 year after Chapter 7?
• FHA loans after Chapter 7 bankruptcy
• Is it hard to buy a house after bankruptcy?
• How to improve your chances
• Buying a house after Chapter 7 FAQ

When does the waiting period start?

Understand that the 2- to 4-year waiting period after Chapter 7 bankruptcy doesn’t start until a court discharges or dismissed your bankruptcy.

That’s at the end of the bankruptcy proceedings — typically 4-6 months after you first file.

If you’re counting down the days until you can apply for a mortgage, be sure to start your calendar on the correct date — of the discharge or dismissal — because it will make a big difference in when you hit the 2-year mark.

“There are some limited circumstances in which you can obtain a loan after one year from the discharge,” explains Andrea Puricelli, production resources engagement manager for Inlanta Mortgage.

“But that’s only if the bankruptcy was caused by extenuating circumstances beyond your control and you’ve since exhibited an ability to manage your financial affairs responsibly.”

Such ‘extenuating circumstances’ could apply if you were forced into bankruptcy due to a serious illness or major job loss or income reduction.

But in most cases, it takes more than a year to recover after declaring bankruptcy. So most home buyers will have to wait two years or more before applying anyway.

“Bankruptcy will not stop you from making a large purchase, like a home, in the future. So yes, it is possible to obtain an FHA home loan after Chapter 7 bankruptcy,” says Jeremiah Heck, a debt and bankruptcy attorney.

“Typically, you have to wait for a minimum of two years after your bankruptcy is approved by the courts to be eligible.”

But in some cases, the mortgage lender may require additional time.

“For instance, some banks tend to ask potential borrowers who filed Chapter 7 bankruptcy to wait a total of three years before they are eligible,” adds Heck.

In addition to the waiting period, you’ll need to meet other FHA loan requirements. These typically include:

• Credit score of at least 580
• Down payment of 3.5% or more
• Debt-to-income ratio below 50%
• Steady income and employment
• Income source expected to continue for 3 years

Avoiding any new debts after bankruptcy — for example, a car loan or personal loan — can help your chances of qualifying for an FHA mortgage once the 2-year waiting period is over.

Requirements for other mortgage loan types 

An FHA loan isn’t the only loan type that can get you on the fast track to homeownership. VA loans also have a minimum waiting period of two years from the date of your Chapter 7 discharge.

To qualify for a VA loan, you need to be an eligible veteran, service member, or member of an associated group (including some spouses).

“For a USDA loan, the waiting period is three years, with some exceptions based on the bankruptcy filing,” Heck notes.

Keep in mind, these types of loans require a higher minimum credit score than FHA loans.

To qualify for a conventional mortgage or VA loan, you’ll typically need a credit score of at least 620. And USDA mortgages require a 640 FICO score or higher.

FHA’s lower credit requirements — starting at 580 — make this type of loan more attainable for home buyers with a Chapter 7 bankruptcy in their credit history.

“Getting a loan will be very difficult for a few years immediately following a bankruptcy,” says Reggie Graham, branch manager for Silverton Mortgage.

He notes that home buyers applying after bankruptcy can often expect bigger down payment requirements and higher interest rates.

“Your focus should be on rebuilding your credit to prepare for applying for a mortgage loan when you’re ready,” says Graham.

Keep in mind that a bankruptcy filing stays on your credit reports for 10 years.

“This doesn’t hinder your ability to buy a home. But it’s realistic to acknowledge that a lender is going to consider that fact when reviewing your loan request,” cautions Heck. “My suggestion is to expect two to three years to rebuild your financial health following a bankruptcy.”

Graham also suggests the wait time to buy a home may be shorter if you file a Chapter 13 bankruptcy instead.

“Chapter 13 involves paying back an agreed-upon portion of your debt, which lenders look more kindly upon,” he explains.

• Pay all your bills on time and in full
• Check your credit score and three free credit reports often and dispute anything inaccurate
• Don’t take on unsecured debt, like personal loans or credit cards, which will most likely come with high interest rates
• Get a secure line of credit or loan that is backed with a deposit you pay beforehand

Having a friend or relative co-sign on new credit lines can also help you qualify more easily and start building new credit.

But this strategy comes with a lot of risk, because the co-signer is agreeing to take over your new debts if you can’t pay them. And if the loan goes bad, their credit will take a hit, too.