How Long After Bankruptcy Can You Buy a Home?

Buying a home after bankruptcy is possible and won't take as long as you think

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Home ownership represents a big part of the “American dream, ” but if you’re struggling with debt, it might seem like an impossible dream. For those considering bankruptcy to deal with debt, don’t be discouraged and think choosing bankruptcy means you won’t be able to get a home loan. In fact, if you’re wallowing in unmanageable debt, choosing bankruptcy might get you closer to buying a home than you are now. Here’s what you need to know about bankruptcy and a mortgage.

How Bankruptcy Affects an Existing Mortgage

If you have a mortgage loan and home now but have fallen behind on payments, Chapter 7 can help you ditch an unaffordable home and move on to more affordable housing options. Chapter 13 bankruptcy can help you stay in the home and catch up on the past-due balance with a repayment plan. Filing bankruptcy can stop foreclosure, but if you can’t afford the house and can’t sell it, the borrower's reprieve will only be temporary. If you surrender a home using bankruptcy, the mortgage balance will be zeroed out and you’ll come out with much of your other debt cleared up too so you can work towards buying another home later.

How Long You Must Wait After Bankruptcy to Get a New Mortgage

The clock starts ticking from when you get your bankruptcy case's successful discharge, not from the bankruptcy case's filing date. After your date of discharge, obtaining an FHA loan usually takes about two years from the date of discharge. With Chapter 7 bankruptcy, it takes just a few months from filing to discharge. However, with Chapter 13, it can take three to five years to complete the process. Chapter 7 is a faster route from excessive debt to a mortgage approval if you qualify for this type of bankruptcy. Other types of mortgages might be approved faster than that, but you don’t want to get into a bad deal because you’re desperate.

What to Do After Bankruptcy to Prepare for a Mortgage 

Waiting and patience are two keys to getting a good, affordable mortgage after your bankruptcy discharge, be it a VA loan, a USDA loan or a conventional mortgage. You don’t want a subprime loan (this is a mortgage with high interest made to riskier borrowers with bad credit). This loan type fell apart most often during the most recent recession. While waiting to buy a home, saving money, developing a budget and good spending habits, and figuring out how much of a mortgage payment you can afford are important steps to take. You don’t want to get in over your head and saving for down payment, moving costs, and other expenses can help a lot.

How to Know How Much You Can Afford 

Deciding how much mortgage you can afford is critical to success as a future homeowner. According to Nerd Wallet, the rule of thumb is that your total expenses should not exceed 36% of your gross pay. In addition to your mortgage, you should include in the calculation all of the money you outlay each month on debt and expenses. This includes groceries, utilities, insurance premiums, car loan payment, student loan payment, clothing, maintenance, unsecured debt like credit card payments, secured debts etc. Add up all your expenses to see what monthly payment you can afford. However, also consider buying less than you can “afford” to give you some wiggle room in your budget.

While Waiting, Work on Your Credit 

Filing bankruptcy can stop your credit history from suffering from late paid bills, maxed out credit cards, and collection accounts. After your discharge, it’s time to work on improving your credit score. The better your score, the more advantageous loan you can get. A lower interest rate is desirable, and you might get more flexible terms on a down payment with a better credit score. Take strategic steps to re-establish credit without taking on more debt, and you might be ready to buy a home after bankruptcy sooner than you think.

To find out more about the benefits of bankruptcy, contact the Law Offices of John T. Orcutt. Call +1-919-646-2654 now for a free consultation with a bankruptcy attorney at one of our convenient locations in North Carolina - Raleigh, Durham, Fayetteville, Wilson, Greensboro, or Garner.