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Prepare to Buy a Home After Bankruptcy

How to Prepare for Buying a Home After Bankruptcy

A Simple Plan

Going through bankruptcy is both emotionally and financially exhausting.

Buying a home after a bankruptcy is not difficult, and in some cases can be as easy as having a simple plan for putting yourself in a position to buy as soon as you are eligible.

The one thing you can count on, is the waiting period.  The time required before you will be eligible for apply for a loan, is a perfect opportunity to get yourself in a position to credit qualify.

How Long to Qualify to Buy After Bankruptcy?

The waiting period to be eligible for a home loan to purchase after a bankruptcy, depends on the type of financing you are applying for.

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Here are the basic waiting periods:

  • FHA – 2 Years from the discharge date
  • VA – 2 Years from the discharge date
  • USDA – 3 Years from the discharge date
  • Conventional – 4 Years from the discharge date
  • Jumbo – 4 Years from discharge – may vary by investor
  • HELOC – 8 Years from the discharge date

All of the above waiting periods have nuances, and you can ask questions below, or send me an email, there’s no way to address everything here in one article.

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For instance, if you had a mortgage included in your bankruptcy, keep reading – it changes everything

How to Credit Qualify

When we start talking about qualifying for a home loan after a significant credit hardship, many times the waiting periods required before being eligible to apply for a loan, give us plenty of time to get everything else lined up.

credit qualifying is not a loan approval

Credit qualifying is not a loan approval, because there are still outstanding underwriting conditions that must be met.  Credit qualifying will, however, allow you the ability to be in a position to get Pre-Approved, once your bankruptcy waiting period has passed.

The first step to getting a credit qualifying approval, you should provide your lender with these documents:

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  • Complete Loan Application – Your lender may refer to this as the application process, or a 1003 (ten-oh-three), and it’s probably the most important of the steps.  1003 is important because it documents your last 2 years residence and employment.
  • Current Credit Report – If this is the early stages of your credit qualification, there may be a need to do some credit repair, or what usually ends up simply being a pro-active approach to building positive credit lines after a bankruptcy.
  • Income & Asset Documentation – Depending on where in the timeline you’re at, the asset documentation may only be a plan to save. Income documentation may include current pay stubs, W2’s, and tax returns if requested.

Building Credit After a Bankruptcy

I’ve seen this on more than one occasion now, and stand by my statement that much bad credit is caused by not having enough good credit on your report.

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By understanding what lenders are looking for, you can build you credit purposefully, responsibly, and in a timely enough manner to meet your other goals for buying after bankruptcy.

Incur New Debt – This is especially true after a bankruptcy.  Depending on the road that led you to BK as a last resort, it is a scary prospect to incur debt as part of the recovery process.

Not all debt is created equal, here’s a quick list of dos and don’ts:

  • DO – Get approved for revolving debt (credit cards)
  • DO – Pay for a secured credit card if you cannot get approved for unsecured
  • DO – Use credit cards for monthly expenses AND Pay OFF each statement
  • NO NOT – Take out “high interest” loans like Cash Call loans.  These are installment loans and raise a red flag with underwriters.
  • NO NOT – Max out your credit cards through a full billing cycle.  I have seen this impact credit scores by over 50 points!
  • NO NOT – Do Nothing!  One of the qualifying criteria is depth of credit.  You need to begin to build credit right away.  You should have a minimum 1 year credit history.

Mortgage Included In Bankruptcy

If there is mortgage debt discharged included in your bankruptcy, it could affect your waiting period.

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The single most important information that will be needed when trying to qualify for a new home loan, is are you still the owner of the home included in BK? If you are still on title of the home, and have not made payments on the discharged debt, you have a challenge.  We’ll address that in a minute.

If you got rid of the home through foreclosure, deed in lieu of foreclosure, or short sale, the date that your name came off title is important in some cases.

Here are the basic waiting periods:

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  • FHA – 3 Years from date name off title
  • VA – 2 Years from date name off title
  • USDA – 3 Years from discharge date of bankruptcy (NEW 12/2014)
  • Conventional – 4 Years from discharge date of bankruptcy (NEW 8/2014)
  • Jumbo – 4 Years from date name off title for Short Sale or DIL / 7 Years for Foreclosure
  • HELOC – 8 Years from date name off title

All of the above waiting periods have nuances, and you can ask questions below, or send me an email, there’s no way to address everything here in one article.

For instance, if your mortgage debt was not discharged in a bankruptcy – it changes everything!

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • ScottSchang says:

    Klscott11 Yes, you can.  Both lenders would have to agree to let you sell for less than what is owed.  If only the 2nd lien holder would be taking a loss, then only they would have to agree to accept less than the full amount owed.  Heck, you’re so close, you could probably just call them and ask what they would accept.

  • Klscott11 says:

    If I add what I owe on my 1st mortgage to the total of my 2nd mortgage that would be $20-30,000 more than my house would sell for. I could do a short sale and eliminate both?

  • ScottSchang says:

    Klscott11 You can absolutely sell the home, it would be a short sale if you owe more than the home would sell for.  Using Conventional financing, you would be eligible to buy again 4 years from the discharge date of the BK, as long as both loans are current, or you are off title to the home.  Using FHA financing, you would have to wait for 3 years from the date of the event. 
    Hope this helps!

  • Klscott11 says:

    Discharged from chapter 7 bankruptcy 3 yrs ago. Stayed in the house but have a 2nd mortgage that we haven’t paid on in several years. 1st mortgage is current. House is assessed at $126,000-we still owe about $90,000. I want out of this house and want to start over. Can I sell this house, use the equity to pay some to the 2nd mortgage (removing the lien) and buy a new house? I make $102,000, have worked for the same organization for 15 years and don’t have much debt other than a car loan and small amount in credit cards. The lien is what’s killing us. If they were unwilling to work out an agreement for “some” of what we owe then I guess we walk away. I would prefer not to do that because then I have a foreclosure to deal with. Please help!! Not sure what to do.

  • ScottSchang says:

    mhgalloway there is a waiting period from the discharge of the bankruptcy before you would be eligible for financing.  That waiting period will be different depending on the type of financing you are trying to qualify for.
    For FHA and VA financing, the waiting period is 2 years from the discharge date. For USDA financing, the waiting period is 3 years, for Conventional financing the waiting period is 4 years from the discharge date.
    Was there a home included in the bankruptcy by any chance?  Also, what State are you buying in?

  • mhgalloway says:

    I was pre approved for a home loan last year and had to file bankruptcy due to my husband having an accident in my car and he was not on my insurance. My discharge was finalized on 08/31/15 and I am eager to get into a position to buy again. What is my first step?

  • ScottSchang says:

    McCoy Unfortunately not.

  • McCoy says:

    My husband was not on the loan or title. But is there a way to qualify using both incomes?

  • ScottSchang says:

    McCoy Was your husband on the loan?  If he was not on the loan, or title, then he could buy on his own.  Was the mortgage discharged through the BK?  If so, you may be able to use conventional financing to purchase 4 years from the discharge of the BK.

  • McCoy says:

    My husband and I filed chapter 7 in 2010. Last May (2014) we sold our home in a short sale. My husband was not listed on the title can he purchase a house now?  Is it possible for me to  cosign for the loan? His Fico score is 706 mine is 686.

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