So you’ve declared bankruptcy at some point in the recent past and now you’re wondering when you can buy a new home? The simple answer to this question is, well, simple: Whenever you want. There aren’t any specific laws limiting your ability to buy a home at any point during or after the bankruptcy process. Whether you’ll qualify for financing to buy a home is another matter entirely.
Your credit scores play a major role
In general, you’re going to have a difficult time qualifying for a mortgage until after your bankruptcy is discharged. Not only is the bankruptcy on your credit reports a red flag to lenders, chances are your credit scores have taken a major hit before and during the bankruptcy process, And while there are lenders who will work with you regardless, you’re not likely to get the best terms on your loan before discharge, and in some cases even until after your bankruptcy falls off your credit reports. Depending on the type of bankruptcy protection you filed for, that could be seven or 10 years.
So how do you go about buying a home if you don’t have cash on hand and need to finance the purchase? Let’s take a look at what is involved in getting a mortgage and how bankruptcy impacts that.
If your credit score is below 600, you may be a candidate for a bad credit home loan, commonly known as a subprime loan. These loans typically carry interest rates that are at least a couple of percentage points higher than standard – also known as prime – borrowers can get. You’re also likely to pay additional fees. In the end, getting a mortgage before your bankruptcy has fallen off your credit reports will likely cost you much more over the life of your loan than if you waited until your credit improved.
Getting a mortgage before discharge
Some lenders are more flexible than others. Of course, the more flexible they are, the higher the interest rate you’re likely to pay, so waiting until you qualify for lower interest rates can be a wise choice. If your circumstance requires that you buy a home sooner rather than later, there are lenders who will give you an FHA, USDA or VA loan even while you are still making payments on your Chapter 13 payment plan. Of course, there are stipulations. You typically will need to have been making regular payments for at least 12 months, and you’ll likely need approval from your trustee. But the government backing of these loans tends to make them a little more flexible.
What if you filed for Chapter 7?
You’ll typically need to wait two years after your case is discharged before you’ll qualify for a mortgage at a decent interest rate. However, again, there are exceptions. Being debt free after your bankruptcy is discharged can shorten this waiting period, as can having adequate savings for a down payment and sufficient income to cover your mortgage and other bills. In other words, the better your financial situation, the more likely you are to qualify for a mortgage sooner (and for better terms).