Buying a House After Bankruptcy

Have you faced bankruptcy?

Even if the process is over, the effects can feel like they’ll last forever.

Haste makes waste—and being hasty to buy a home immediately after facing major financial hardship might not help your case. When it comes to bankruptcy, foreclosure, and a short sale, being hasty won’t help you at all. 

While mortgage rates remain at an all-time low in the wake of COVID-19, it can be tempting to want to buy now. But if you’ve recently had unwanted financial problems, the cold hard truth is you must wait before being a homeowner again. 😔

You’ll have to fight the temptation to buy and understand that your situation forces you to wait. As President John F. Kennedy once said “Life’s not fair but not always to your disadvantage.” And even after going through big financial difficulties, homeownership is still a possibility…if you’re just a little patient.

Plus, it’s important to not follow the cycle of millions of Americans and end up getting stuck with a mortgage you can’t afford in the long run. If you’ve faced foreclosure, bankruptcy or a short sale, patience is the key. And here’s what you need to know about how to buy a house.

What you’ll learn

• Buying a House After Bankruptcy
• Bankruptcy Wait Times
• Buying a Home After Foreclosure
• Foreclosure Wait Times
• Buying a Home After a Short Sale
• Waiting Times by Mortgage Types
• Speeding Up the Process
• Tips While You Wait

How Soon After Bankruptcy Can I Buy a House? ⚖️

To file bankruptcy is to accept financial defeat—and sometimes admitting defeat is a necessary step to move on and rebuild. Bankruptcy is a substantial legal process that exists to help the financially struggling consumer get a clean slate. In fact, hundreds of thousands of Americans use this legal process to get a financial fresh start every single year. 

But, in the current coronavirus era, bankruptcies are at a historic low, thanks to the pandemic recession and the instability in the economy. Despite the current low number, consumers can and still do resort to declaring bankruptcy. So if you are one of those consumers with a bankruptcy on your record, you aren’t alone.

To be truthful, while filing bankruptcy allows you to start anew, there are some strings attached to the process. Bankruptcy can have a pretty long waiting period before it comes off your credit report. Plus, there can also be some serious negative side effects to your credit score, so it may be worth your while to attempt to get the bankruptcy removed.

Bankruptcy Wait Times ⏰

In general, when you file for either Chapter 13 or Chapter 7 bankruptcy, you must live 7 to 10 years with the mark on your credit report. While in that seven to ten year window, It can be hard to borrow money.

Lenders like to see a healthy, long, well-established payment history. A bankruptcy signifies that you had to abandon ship on some of your debt due to financial overwhelm. Therefore, you can see why buying a home after a recent bankruptcy can be tough for some bankrupt consumers.

But let’s look on the bright side. And that bright side is that nowadays the wait time for a bankrupt consumer to qualify for a mortgage is much shorter. ☀️

The wait times depend on the specific mortgage program as well as other factors, such as your circumstances for going bankrupt. But, the general consensus is that you may be able to buy a home as soon as one to two years after filing for bankruptcy.

Buying a Home After Foreclosure 🔒

Just like with the number of bankruptcy filings, foreclosure filings also saw a sharp decrease in the past year due to the pandemic. When you cannot, or do not pay your mortgage, you are at risk for foreclosure. 

A foreclosure happens when the lender uses their legal right to take possession of the property after nonpayment. The lender will then attempt to sell the property to recoup their loss.

This means that the homeowner is evicted and legally required to leave the premises. Foreclosures can be a devastating process to live through—like a bankruptcy, foreclosures can also do some devastating things to your credit report and ability to borrow. Amongst these devastations include the hindrance in your ability to buy another house.

Foreclosure Wait Times 🕑

But, while buying a home after a foreclosure can be difficult, it’s not so difficult that it becomes impossible. Like with bankruptcy, the timeline on which you can buy a new home after having a foreclosure depends on your situation and the loan product. 

If you have a foreclosure before bankruptcy, it’s possible your wait period will be shorter to buy. In this case, the waiting period starts at the discharge date of the bankruptcy. This puts you at a 2 to 4 year wait time, barring any extenuating circumstances.

But how long do you wait if the foreclosure happens after the bankruptcy? Typically, if the foreclosure happens after the discharge of the bankruptcy you must wait either three or four years.

This is of course circumstantial and depending on the loan product—for example, FHA loans require a three-year wait, while other federal programs may only make you wait four years.

Buying a Home After a Short Sale 🏘

Similar to a foreclosure, a short sale is another financial hardship involving the loss of your home. A short sale occurs when the homeowner makes the decision to sell their home for less than the amount owed on the mortgage. This makes a short sale different from foreclosure in the fact that the homeowner voluntarily sells their property.

In the process of short-selling, the proceeds from the sale of the property land in the hands of the lender. The lender at that point can choose to forgive the difference or enter a deficiency judgment against the borrower. 

A judgment is a legal entry that requires the borrower to repay all or part of the difference. And just so you are aware, a judgment is also a mark on your credit report—and a nasty one at that. 

A short sale can do horrifying things to your credit, such as causing a loss of 100 to 150 points. Like bankruptcies and foreclosures, having a short sale can affect your home buying itinerary by forcing a waiting period of 2-3 years. However, if you were current on payments for 12 months before the short sale, you can have no waiting period to buy again.

What is a Deed in Lieu of Foreclosure? 🔎

Another home-related hardship is a deed in lieu of foreclosure. A deed in lieu differs from both the foreclosure and short sale process. With a deed in lieu, you and your mortgage lender will come to a mutual agreement that you can no longer make your payments. Upon the discussion, the lender agrees to not put the home into foreclosure in exchange for you handing over the deed.

When you turn the property over to the lender, the lender releases the lien. Surrendering the property also allows the lender to recover the debt without pushing you into foreclosure.

You are also freed from anything you may owe on the mortgage. A lot of homeowners may take this route when they are upside down on their house, meaning they owe more than what it is worth. 

Surrendering your property isn’t as extensive or as expensive as the legal process of foreclosures. Plus, the damage to your credit is substantially less with a deed in lieu compared to a foreclosure. And finally, a deed in lieu only lingers on your credit report for around for 4 years.

Waiting Times by Mortgage Types ⏳

It should come as no shock that you won’t be able to qualify for a mortgage loan immediately after a financial hardship. Depending on the credit delinquency and financial hardship, you will find that the time frame you must wait will vary. 

But the most major factor of the wait time is the loan program you are interested in. Different loan programs service different types of customers in different situations. Therefore, it’s important to understand the wait times for the specific loan product you seek to qualify for.

VA Loans 🎖️

If you are a veteran or the spouse of a veteran, it really pays to reap the rewards of a VA loan. The Department of Veterans Affairs offers VA loans for both current and former members of the United States Armed Forces. These loans have some added benefits including flexible closing costs, a 0% down payment, and no Private Mortgage insurance requirement. 

If you’re a veteran and have experienced foreclosure or a short sale, you can qualify for the VA loan program after two years. For Chapter 7 bankruptcy, the time window is also two years from discharge. If you filed Chapter 13 bankruptcy, you must complete your original plan or have made 12 consecutive on-time payments.

FHA Loans 🏠

FHA loans are backed by the Federal Housing Administration. These loans offer more options for both first time and bad credit borrowers. In fact, FHA loans are the most popular loans among the millennial generation due to their lax-compared-to-other-programs guidelines.

Typically, when you decide to get an FHA loan you must wait three years from your foreclosure and bankruptcy discharge to get a mortgage. Three years is also the time to wait in line in the case of a Deed In Lieu with FHA. It’s also important to note that FHA loans have certain limits, which depend on the specific location of the home in question.

When it comes to short sales and loans provided by the FHA, it’s a completely different ballgame. If you made 12 consecutive on-time payments prior to the short sale, there is no waiting period to qualify for an FHA loan. 

But, if you were over 30 days late on a payment in the 12 months before the short sale, you must wait 3 years. Regarding bankruptcy, the borrower must have made 12 consecutive on-time payments or be discharged from the bankruptcy (Chapter 13.) 

Additionally, depending on your unique situations there can be different waiting times. Lenders can work with you if you’ve found yourself in an unfortunate situation. 

These extenuating circumstances include things like sudden job loss, divorce, or medical issues. The fact is that lenders are far more likely to work with you if your situation is out of your control as opposed to if your situation involves frivolous credit card spending.

Regardless, an FHA loan may be a great choice for you if you’ve seen recent financial devastation. It pays to know the FHA Loan requirements to determine if they are the right fit for you and your situation.

Fannie Mae or Freddie Mac 🏛️

Both Fannie Mae and Freddie Mac are two government-established entities, created with the intention to boost the housing market. Also known as secondary market loans, Fannie and Freddie programs purchase loans from banks all across the nation. As the honorary Jack and Jill of the home loan market, both programs have similarities as well as stark differences. 

Perhaps the biggest of these differences is the target market in whom they serve. Fannie Mae tends to service the larger retail banks, while Freddie Mac targets the smaller or more local banks.

However, both programs have a goal to mass-produce loans and keep interest rates low while doing it. Fannie and Freddie have also proven to show mercy to consumers during tough times like the COVID-19 pandemic. Both programs have recently extended moratoriums on foreclosures—for the fifth time since the start of the pandemic.

But, if you go through a hardship, your wait time before obtaining a Fannie or Freddie is going to be longer than with VA and FHA loans. Usually, this time is 4 years for short sales, deed in lieus, and chapter 7 bankruptcy.

Fannie and Freddie are not as lenient when it comes to foreclosures. For foreclosures, the wait time is 7 years unless you find yourself enduring an extenuating circumstance.

USDA Loans 🌾

USDA loans are yet another federal loan program, specifically provided by the US Department of Agriculture. As the name suggests, this program mainly seeks to service rural areas and rural housing developments.

The wait times for USDA loans are similar to FHA loans, with one small difference. Instead of waiting 2 years from discharge on their chapter 7 bankruptcy, borrowers must wait 3 years to seek a mortgage. All other requirements are the same as FHA loans.

Personal Mortgage Loans 🏦

Known more widely as conventional loans, personal mortgage loans aren’t backed by any government agency. These types of loans are originated and serviced by private mortgage lenders. These loans are typically from banks, credit unions, and other financial institutions. 

The top private mortgage lenders might give you the cheapest deals, but they do not share the leniency and benefits of government-backed programs. You typically must have a better credit score and a percentage of the home value as a down payment. It should come as no surprise that these types of loans are even harder to get when you have financial hardship. 

When you have a foreclosure you must wait 7 years to obtain a conventional mortgage loan, and with short sales, this wait time is 4 years. Both of these wait times also correspond with how long you will be stuck with the mark on your credit report. Additionally, Chapter 7 borrowers will have to wait 4 years from discharge, and chapter 13 borrowers must wait at least 2 years.

It’s uncommon to see private mortgage lenders allow extenuating circumstances to cut the wait times down. This is because these loans are privately serviced.

Jumbo Loans 💲💲💲

A jumbo loan is a mortgage that exceeds the loan limits set by the federally backed Fannie Mae and Freddie Mac. Jumbo loans can allow qualified borrowers to borrow as much as $2,500,000. Because jumbo loans are portfolio loans, they aren’t directly sold by Fannie Mae or Freddie Mac but instead are sold by private investors.

Just like with conventional and personal loans, it’s up to the lender selling the loan to decide the wait periods after facing hardship. It’s possible you will have to wait as much as seven years to get a jumbo loan or can wait as few as two years, depending on the hardship.

Portfolio Loans 📁

These types of loans are also known as “non-conforming” loans, meaning they do not abide by the guidelines of other existing loan programs. Portfolio loans have more leniency. This allows clients who have been through financial struggles in their recent past to qualify for home loans. 

These loans are not sold to Freddie Mac or Fannie Mae nor are they backed by federal agencies like the FHA, VA, and USDA. Like jumbo loans and personal loans, it’s up to the individual lender to determine wait times after facing financial devastation. 

How To Speed Things Up 🏎

Waiting a few years to buy a home can be super frustrating. It’s salt in the already deep wound of financial hardship that landed you in the position, to begin with. However, there are a couple of things you can do, or attempt, to speed up the waiting period.

Check For Extenuating Circumstances 🚨

According to Fannie Mae, extenuating circumstances are a one-time and nonrecurring event that is beyond the borrower’s control and that causes an abrupt, prolonged, and significant increase in expenses or drop in income. These circumstances include things like job loss, divorce, illness, or the unexpected death of an individual who provides income, like a spouse. 

If you’ve found yourself in one of the above situations, it’s very possible your wait time to borrow can be shortened. In most cases, the lender will want you to provide a letter explaining your situation along with supporting documentation of the hardship like medical bills, a divorce decree, death certificate, or layoff notice.

Assessing recent events of your life to see if they fall into the category of extenuating circumstances can be worth your while. Also, it’s a way to make the best of a terrible situation if you can use your struggle to obtain a home loan. Different private lenders as well as federal loan programs may have different definitions of extenuating, so check around.

In a closely related example, the COVID-19 pandemic has put an indefinite pause on foreclosure and eviction proceedings. Apparently, the pandemic is considered to be an “extenuating circumstance” in the government’s eyes. 

Remove the Negative Items From Your Credit Report ❌

If you want to speed the process along, it really pays to try to have negative items expunged from your credit report. Negative items will not only include things like foreclosures, bankruptcies, and short sales but can include many other factors too. Missed payments, collections, charge-offs, judgments, other repossessions, and hard inquiries are just a few.

According to the credit model FICO, payment history accounts for 35% of your overall score. And more than likely to get to the financial hardship phase, you would have had to miss some payments. Because of their heavy impact on your credit, consider attempting to have any missed or late payments removed. This could help speed things along tremendously if you are successful.

What to Do While You Wait 🤔

Patience is of a virtue—and you need that patience to get through financial hardship. Plus, you’re going to have to wait some time to buy a home again anyways. Here’s some things to do while the clock ticks.

Monitor Your Credit Report 🔎

Staying on top of your credit situation is a must, and you can use a credit monitoring service to help you do so. A foreclosure, bankruptcy or short sale will cause substantial damage to your credit score. Therefore, monitoring your credit report allows you to catch any mistake or error that may damage your credit score even more.

Rebuild Your Credit 🛠

Going hand in hand with monitoring your credit is to begin the process of rebuilding your credit. The better your credit, the better of a shot you have at obtaining a mortgage loan and a decent interest rate. Improving other factors of your credit score can also help minimize the more damaging effects of a financial devastation.

Don’t Quit Your Job 💼

Having stable and steady employment is one of the most important factors of obtaining any mortgage loan. If you are waiting out the time window to get a mortgage loan, consider waiting your job out too. If you quit your job in the process it can make obtaining a mortgage loan even more difficult.

Save a Down Payment 💰

Cash is king, and the more money you can put down on your home the better off you will be. It will also help your position in the eyes of the lender. Having more cash to put down can help lessen the negative impact of the financial hardship you faced.

Familiarize Yourself With Loan Products ✔️

Are you a veteran? Recent graduate? First time buyer? There are loans for several situations and all phases in life, and learning the specific products you may qualify for can help you get a better understanding of the overall picture. 

If you have bad credit, check out lenders that specialize in bad credit loans. Consider federal programs like FHA or VA if you’re eligible. Understanding who can better service you once your wait is up will help the process once it comes time to buy.

The Bottom Line

At the end of the day, sometimes facing financial hardship is part of life. If you are unlucky enough to face bankruptcy, foreclosure, or short sale, it’s not the end of the road for your homeownership goals. No sugar coating here—it will be tough, but going through a substantial financial struggle isn’t something you can’t overcome.

While the sad fact is that you will have to wait a set time frame to buy a house, your specific situation and other factors will determine this time frame. Try checking into various loan programs you may qualify for and their specific wait times.

You can speed things along by checking for extenuating circumstances and attempting to have the negative event removed from your credit report. If you can’t speed things along, have patience. And while you wait, get your free credit report, rebuild your credit, keep a job and save money for a down payment.

Remember, good things come to those who wait. If you put in the effort and have the patience you will be well on your way to homeownership. 💪

About the author

Summer Nevins

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Summer is a banking professional and business school graduate turned expert finance writer. Raised in a small low-income town in the southern United States, Summer, like a lot of millennials, learned the ropes of personal finance the hard way. Both her work and life experiences led to discover her true passion for educating others about the complicated field of finance. Summer currently resides in the Greater Nashville Tennessee area with her husband. When she’s not writing, Summer enjoys exploring the beautiful world and hiking all of the challenging trails along the way.