Considering today’s tough economy, job market, and housing market, it’s no surprise that a lot of people are asking the question how long after a bankruptcy can I buy a house?
First, it’s worth noting that there’s not necessarily a limitation on buying a house, just on getting a home loan through a regular mortgage lender. It’s still possible to buy a house right away, but you’ll have to get a little more creative with how you do it.
Most mortgage lenders today require you wait a certain amount of time before you’ll be able to qualify for a new mortgage. How long the waiting period is depends on the circumstances surrounding the bankruptcy, the type it is, and the kind of mortgage financing that you’re seeking.
How Long After a Bankruptcy Can I Buy a House?
In today’s marketplace, most traditional bank mortgages are either Fannie Mae conventional or FHA financing – and both require you to wait for a period of time before you’ll be able to qualify for a new mortgage. The following is a rundown of the waiting period guidelines for Fannie Mae and FHA for Chapter 7 (debt liquidation) and Chapter 13 (debt repayment) bankruptcies.
Note that these guidelines are subject to change at any time and lenders will often add their own more stringent qualifying criteria to what you see here. Be sure to consult with a qualified mortgage professional for more specific information about your particular situation.
Fannie Mae Bankruptcy Waiting Period
- Chapter 7: The standard waiting period to obtain a new Fannie Mae loan after a Chapter 7 bankruptcy is four years and is measured from the discharge or dismissal date of the bankruptcy. If you can document that significant extenuating circumstances beyond your control led to the bankruptcy, the waiting period could be reduced to as little as two years.
- Chapter 13: The waiting period for a Chapter 13 bankruptcy depends on whether the bankruptcy was discharged (completed) or dismissed (not completed). If your Chapter 13 was discharged, your waiting period is two years. If it was dismissed, the wait will be four years. Fannie Mae guidelines allow for a reduction of the waiting period for dismissals to two years if significant extenuating circumstances beyond your control led to the bankruptcy and can be documented. There is no waiting period reduction for discharges.
- Multiple bankruptcies: If you have more than one bankruptcy on your credit report in the past 7 years, your waiting period is 5 years from the most recent dismissal or discharge date. The waiting period may be reduced to 3 years if extenuating circumstances apply and can be documented.
FHA Insured Bankruptcy Waiting Period
- Chapter 7: The minimum waiting period for an FHA insured mortgage is 2 years since the discharge date of the Chapter 7 bankruptcy as long as you have reestablished your credit and have not taken on new credit obligations. Like Fannie Mae, however, the wait may be reduced to twelve months if significant extenuating circumstances can be documented and you have since shown that you can manage your finances well.
- Chapter 13: It’s possible to qualify for an FHA insured mortgage while in Chapter 13 as long as at least one year has elapsed since entering into the repayment plan, payments have been paid on time, and the bankruptcy court has given its permission for you to enter into a mortgage transaction. If your Chapter 13 has already been discharged, the standard waiting period is two years, but it’s possible it could be reduced or eliminated if you otherwise have strong qualifications.
A Few Words About Extenuating Circumstances
Though both Fannie Mae and FHA guidelines do allow for a reduction of the waiting period for extenuating circumstances, you may have a tough time finding a bank that will allow it as well.
What is considered “extenuating” can be awfully subjective, and lenders have a deep fear of being forced to “buy back” a funded loan from one of their investors because of a difference in opinion about what truly is extenuating.
Again, though the official guidelines say one thing, it’s not uncommon for lenders to add their own more stringent guidelines. Just because Fannie or FHA allows for certain extenuating circumstances doesn’t mean the lender you’re working with will as well.
Update 8/15/2013: FHA has added some new guidelines for home purchasers that may make it easier for lenders to underwrite and approve borrowers with extenuating circumstances. If your bankruptcy was the result of circumstances beyond your control (such as a job loss due to the bad economy), and you can document that you took at least a 20% loss of household income for at least 6 months, it may be easier for lenders to approve you for an FHA purchase mortgage even if you’re within the bankruptcy waiting periods. Be sure to check with your lender for more details.
For more information, you can check out the official FHA mortgagee letter here.
Work on Rebuilding Your Credit Right Away
If you’ve recently been through a bankruptcy, it’s important that you begin taking steps to rebuild your credit right away. Even if you had all your debt eliminated through the bankruptcy, there often are lingering issues that remain on your credit report, such as collections or charge-offs. Just because a debt was eliminated through bankruptcy doesn’t guarantee that the account will be updated accordingly on your credit report. The sooner you work to rebuild your credit, the more easily you’ll be able to qualify for new mortgage financing once the waiting periods are over.
Alternate Financing Options
A regular mortgage loan from a regular mortgage lender isn’t the only way to purchase a home. If you really want to purchase a home right away, you may be able to make it happen by getting a little more creative. The following are a few alternative financing options that have worked great for many people:
- Seek a non-traditional financing source. Sellers, private lenders, and hard money lenders can be a great way to finance a home. Chances are you’ll pay a higher rate on the money, but you can always refinance it in the future once your credit improves and you’re past the waiting periods.
- Look for lease-to-own or lease option programs. These types of programs are often offered by real estate investors who cater to buyers with damaged credit and have a rehabbed property they wish to sell. These types of programs may not be legal in all states and they can get complex, so be sure to do your due diligence.
- Pay cash. If you have enough cash on hand to pay for the home outright, it might be worth it. You can always cash out a mortgage in the future once your credit has improved and you’re past the waiting periods.
A great place to track down alternate financing options to purchase a home is through local real estate investment clubs. Do a Google search for real estate investment clubs in your local area and consider attending the next meeting.
As with any situation where you’re working with somebody you don’t know well, be sure to ask for references and do your due diligence before getting into a deal.
This is just a very general overview and other guideline nuances can apply. For more detailed information about your particular situation, it’s important to consult with a qualified mortgage professional. It’s also important to note that though these are the standard guidelines for Fannie Mae and FHA, lenders that underwrite to Fannie Mae and FHA guidelines might add their own more restrictive guideline overlays.