Home Buying After Bankruptcy – Yes You Can!
Is home buying after bankruptcy possible? Most people think that they must wait for a bankruptcy to be “wiped” from their record before they can even think of buying a home. This is not true. Having a bankruptcy “wiped” from a credit record is not the same thing as a “waiting period” to apply for a loan.
Types of Bankruptcies
There are basically two types of bankruptcies that are the most likely to affect homebuyers – Chapter 7 and Chapter 13. A Chapter 7 bankruptcy is defined as “a liquidation designed to wipe out general unsecured debts such as credit cards and medical bills. This bankruptcy remains on your credit report for 10 years. A Chapter 13 bankruptcy is a “reorganization designed for debtors with regular income who can pay back at least a portion of their debts through a repayment plan”. This type of bankruptcy remains on your credit report for 7 years.
Understanding Waiting Periods
Whether you have filed for Chapter 7 or Chapter 13 bankruptcy protection, the waiting period to apply for a loan begins to run from the date the bankruptcy was “discharged”. A bankruptcy discharge is a court order that states that you no longer are responsible for paying certain debts, or that only a portion of the debt needs to be repaid according to the terms of the bankruptcy.
Chapter 7 Waiting Periods:
- FHA Loans – 2 Years
- VA Home Loans – 2 Years
- Conventional Mortgages – 4 Years
- USDA Home Loans – 3 Years
Chapter 13 waiting periods are more unique to your individual situation and are handled on a case by case basis. In some instances, you may be able to qualify for an FHA loan with 12 months of payments on your bankruptcy plan. For conventional loans, the standard waiting period is 2 years after the discharge date.
Reestablishing Your Credit
No matter the type of bankruptcy you have filed, whether it be Chapter 7 or Chapter 13, you will be eligible to apply for certain loans long before the evidence of the bankruptcy will be erased from your credit report. However, this does not mean that the bankruptcy will not affect your prospects of getting approved for a loan. Remember, the most important thing to a bank is determining whether the person applying for the loan will be able and willing to pay it back. In order to increase your chances of getting a loan approved, especially after filing bankruptcy, work on reestablishing your credit as soon as possible.
There are various ways to reestablish your credit and prove your creditworthiness to a bank:
- Obtain a secured credit card. This is a great way to establish credit quickly. These cards are secured by your prepaid funds, and you can make charges up to the amount of funds you’ve deposited. Use this card strategically to build a strong credit history, and it won’t be long before you qualify for an unsecured credit account.
- Get a low-limit credit card and use it strategically. While obtaining a credit card and holding on to it for emergency purposes only—like car repairs—is a nice safety net, if you don’t use your card you won’t establish credit. To build credit, use a store retail card or standard credit card for routine purchases that you budget for each month, like household items, groceries or gas.
- Pay your balances in full and on time. Your payment history and credit amounts owed make up 65% of your credit score. By paying your balances in full each month and on time, you will build positive credit history.
If your family was negatively impacted by the housing bust, here is light at the end of the tunnel! By following the above recommendations, you could be on your way to a new home faster than you think! Contact ED MOLONEY for more.