How to Buy a House if You have Filed for Bankruptcy

Here’s how to buy a house if you’ve filed for bankruptcy:
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There’s no question: Life would be easier if you could really collect $200 every time you passed “Go.” Unfortunately, the world is more complicated than a board game. And sometimes, you have to take drastic measures to pull yourself up from underwater. 

If you’ve filed for bankruptcy, it could feel like game over. No more free parking. No way to collect property along the boardwalk. But we have good news! Bankruptcy is not the end. In fact, in the best cases, it’s a new beginning to meeting all of your financial goals, including those for owning a home.

Here’s how to buy a house if you’ve filed for bankruptcy:

Chapter 7 vs. Chapter 13 Bankruptcy: What’s the Difference?

The most common of the five types of bankruptcy that affect individual consumers are Chapter 7 and Chapter 13. Many mortgage lenders look more favorably on Chapter 13 debtors. Here’s why:

Chapter 7 bankruptcies (otherwise known as “straight” or “liquidation” bankruptcies) generally help you discharge your unsecured debts (e.g. credit card debt, medical bills, unsecured personal loans) within 4–6 months. As part of the process, a court-appointed trustee can sell your nonexempt property to pay your creditors. This includes any nonexempt belongings, such as property with a lien on it and that which you offered as collateral for a loan. Only low-income consumers qualify for this kind of bankruptcy. 

On the other hand, a Chapter 13 debtor is generally permitted to keep all of their property. Instead, you “reorganize” your debt over time (usually 3–5 years) through an affordable repayment plan. To file Chapter 13, you need to have enough income to afford the payments and be below the maximum total debt limits (currently nearly $400,000 for unsecured debts and $1 million-plus for secured debts). But once you finish the repayment plan, the remainder of the unsecured debts is discharged. Lenders prefer this kind of bankruptcy because the debtor is at least trying to pay back their debts.

How Long will a Bankruptcy Impact Your Credit Score?

While filing for bankruptcy can help you clear many outstanding financial burdens, it can also wipe out much of your credit score. Financial experts say a Chapter 13 bankruptcy will stay on your credit reports for seven years. In contrast, a Chapter 7 will stay on your reports for 10 years. However, it is very possible to begin rebuilding your credit score much sooner. If you have a strategy, stay vigilant, and stay on budget, you may be surprised as how quickly you can build your FICO score to the minimum lenders require for a mortgage.

How Soon can You Buy a House after a Bankruptcy?

Credit scores aren’t the only thing that a bankruptcy will affect. It may take some time to bounce back from a bankruptcy, but owning a home can still be part of your future. 

How soon you can buy a house after a bankruptcy depends on several things, including the type of loan you’re seeking and how you handle your credit in the wake of your bankruptcy. Under Fannie Mae, if you filed for Chapter 7 bankruptcy, you have to wait at least four years from when the action is discharged unless you can prove extenuating circumstances. If you can document that the bankruptcy was out of your control, you may be able to apply for a conventional mortgage within two years.

For Chapter 13 bankruptcies, the amount of time you will have to wait before you can get a mortgage depends on whether your bankruptcy was discharged or completely dismissed. If your Chapter 13 bankruptcy was discharged, you need to wait at least two years from the discharge date to qualify for a conventional mortgage. However, if your Chapter 13 bankruptcy was dismissed, you have to wait at least four years from the dismissal date.

If you’re applying for an FHA loan, which is considered lower risk to your lenders, the wait time is two years for Chapter 7 and one year for Chapter 13, assuming you have made all your payments on time for that year. The same is true for VA-backed loans. USDA loans require a wait time of three years since your bankruptcy in addition to their other requirements.

What do You Need to do to Buy a House after a Bankruptcy?

A bankruptcy is a trying financial and personal experience. However, with a little hard work, it should not preclude you from meeting your future financial goals. If owning a home is in your plan, there are at least six steps you can take to ensure you’re ready to wow your lenders as soon as your waiting period has passed.

1. (Re)Organize Your Finances

Now that your debts have been discharged (or you’re well on your way), it’s time to get your finances back in order. Request a copy of your credit report, and plan to review your credit regularly. After all, lenders are looking at your report—you don’t want to be surprised by what they find. Examine what debts remain, and create a workable monthly household budget. Make sure you can pay every one of your bills on time, every month. 

2. Build Your Savings

It’s important that in addition to paying off your bills, you pay a little money to your future self each month, too. Depending on your monthly budget and expenses, this may feel like a difficult step. However, the practice of saving is just as important as the money you put away. Start with $5 a week if you need to, but do it consistently. If you have to, use an app or automatic deduction from your paycheck to put the money away before you even see it. The more you can save every month—without touching it!—the better.

3. Open a Line of Credit

Once you feel confident with your budgeting and savings, consider opening a credit card. Be sure to pay it down each month, though. That way, you’ll build back up your credit without building back up your debt. A secured credit card is another option. It is backed by the money you have in savings, so if for some reason you fail to pay, the creditor will draw from the savings account and reduce your credit limit. 

4. Understand Home Ownership

Owning a home sounds like a dream, so do a little planning to prevent it from turning into a nightmare! Make sure you understand what you can afford, but don’t forget to plan for the unexpected expenses. Home maintenance can include anything from buying a vacuum cleaner to replacing an entire septic system. And you don’t often get to decide when those major purchases need to happen.

5. Get Your Paperwork Together

Honestly, after going through the bankruptcy process, organizing your financial documents for a mortgage application may feel like a breeze! Begin collecting paper and electronic financial documents well before you fill out your mortgage application. Make sure a copy of your bankruptcy petition is ready, and add it to your credit report and bankruptcy discharge documentation. Some lenders also require a detailed letter explaining why you needed to file for Chapter 7 or Chapter 13 bankruptcy in the first place.

If you’re not sure what documents your lender will require, ask! Any missing documents can cost you time and money during your home closing.

6. Find the Right Mortgage for You

Even under the best of financial circumstances, it’s smart to shop around for your home loan. As a bankruptcy debtor, you’re likely to expect a higher interest rate for your home loan. However, depending on the type of loan that’s best for you and where you choose your lender, you could save yourself big bucks over time. Understand the difference between conventional loans and government loans. Know your interest rate options. And don’t forget about the additional fees and expenses that come with home buying.

Begin Your Next Home Search Today!

Are you ready to get back on your feet and make your home buying dreams come true? Beverly-Hanks Mortgage Services can help you determine if you are qualified for a home loan. Once you’re sure, go ahead and begin looking! Our professional real estate agents can work with you, on your timeline, to help you find the best home for your needs and budget.

Find your dream home in Western North Carolina now!

5 Responses to “How to Buy a House if You have Filed for Bankruptcy”

  1. Thanks for explaining that you should keep a copy of your bankruptcy petition if you want to buy a house after filing for bankruptcy. My husband and I would like to file for bankruptcy because we’re worried about our payments. I’ll start looking for a law office in the area.

  2. Hello!
    This information is a must for anyone who has fallen on hard times financially. I am glad that there are such comprehensive and well developed articles that address all these concerns that people who have had to file for bankruptcy have.
    Although, I always believe there is nothing better than the advice of a skilled attorney.

    Thank you and best regards!

  3. Thank you for all the information you provide to help others facing problems. Your work is invaluable!
    If you have filed for bankruptcy, you may still be able to purchase a house. Before you make any decisions, however, it is important to speak with an attorney to ensure that the purchase is legal and profitable for you.

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