How Soon Can You Buy A Home After Bankruptcy Or Foreclosure?
August 21, 2018Working in the world of financial wellness gives me almost unlimited opportunities to meet and speak with people from all walks of life. I also get to see and hear all manner of personal finance failures, setbacks, and triumphs.
Whether it’s celebrating the joy of someone who finally dug themselves out from under a mountain of soul crushing debt, or soberly talking someone else through the process of giving up the family home to foreclosure or considering personal bankruptcy as their next (and unfortunately best) financial move, some of these situations can really tug at one’s heart strings.
One thing that surprises me, though, is how resilient and mentally tough most people are when facing very serious financial obstacles. For example, people who find themselves in the middle of bankruptcy or foreclosure (sometimes both) are often in a hurry to jump back in and apply for another home mortgage right away, sometimes before the ink is dry on the foreclosure document or the bankruptcy has been fully discharged.
Safely becoming a homeowner again
Although I applaud this kind of enthusiasm, let’s take a step back and review just what we need to do in order to safely re-enter the world of home ownership after employing one of these personal finance nuclear options.
When you’ve had a foreclosure
If you were unable to make your mortgage payments in the past and ended up giving the home back to the bank through a foreclosure process, you are likely looking at a minimum of two years before you could qualify for a mortgage once again. You might have to wait even longer than that.
Different programs have different waiting periods
The waiting period following foreclosure starts after your foreclosure is completed; typically the date when your former home was sold as part of the foreclosure process. Depending on what type of mortgage you are looking at for starting over, you may have to wait up to seven years in certain circumstances.
VA: The Veterans Administration requires a minimum waiting period of two years following a foreclosure
FHA: The Federal Housing Administration has a three year wait for FHA loan qualification.
Conventional mortgage: Fannie Mae (FNMA) and Freddie Mac (FHMC) conventional loan requirements are even more strict. The waiting period for a conventional mortgage following foreclosure can be up to seven years, although certain exceptions for extenuating circumstances may enable you to qualify in as few as three years.
Your best chance to expedite the process
If you can provide a large down payment (more than 25%), some private lenders might consider underwriting your mortgage as early as two years following a foreclosure, but don’t count on receiving the best interest rate on the loan.
When you’ve had a personal bankruptcy
Chapter 13 – when your debts are restructured
Chapter 13 is the less devastating (though still financially destructive) version of personal bankruptcy where your debt doesn’t go away, but it is restructured to allow you to make full or partial payments to your creditors over a specified period of time. Under Chapter 13, you generally get to keep control of your assets, but your credit score will take a considerable hit.
Surprisingly, you might be able to qualify for a home mortgage in as few as 12 months after filing (not discharging) Chapter 13 bankruptcy. Surprise! It is possible to still buy a home while in the midst of a bankruptcy. The key will be to keep your payment habits and general credit history squeaky clean during that time, and the bankruptcy court will have to agree and approve.
Waiting periods for different programs when you’ve had Chapter 13
The general waiting periods for various types of mortgage qualification following Chapter 13 are as follows:
- FHA: 1 year after filing
- VA and USDA: 2 years after filing
- Conventional (Fannie Mae & Freddie Mac): 2 years after discharge, or 4 years after dismissal
Chapter 7 – when you liquidate
Chapter 7 personal bankruptcy is the more serious of the two, and generally involves selling most of what you own to pay creditors what you can, but then you start “fresh” and debt-free, albeit with a severely banged up credit history for several years afterward. Since Chapter 7 liquidation this is the more onerous of the bankruptcy types, you can expect a longer and more difficult road back to home ownership after pulling the trigger on this one.
Waiting periods for different programs when you’ve had Chapter 7
Waiting periods for various loan programs following Chapter 7 are typically:
- FHA & VA: 2 years after discharge (not filing) of Chapter 7
- USDA: 3 years after discharge
- Conventional (FNMA & FMHC): 4 years after discharge
Hitting your financial reset button
If you have ever endured (or are contemplating) foreclosure, personal bankruptcy, or perhaps the agony of both simultaneously, you may think that home ownership is never to be part of your financial picture again. Fortunately, there is more than one path back to home ownership, and the key is returning to some basic financial good habits, such as regularly saving for a rainy day and avoiding credit card debt.
Rebuilding a healthy credit score and keeping it healthy will also be critical. Although it can seem like a penalty, there is one good thing about waiting periods for mortgage programs following a foreclosure or bankruptcy – the wait time is an excellent opportunity to focus on repairing and restoring our good financial habits while saving up for a down payment, so we can enjoy a fresh start in a new home.