Filing for Chapter 7 bankruptcy is an excellent way to start fresh when you’re in financial distress, but as you likely know, it doesn’t come without a few strings attached. While Chapter 7 bankruptcy will wipe out the majority of your unsecured debts and make it easier for you to afford a home purchase, it will also affect your credit.


So does a bankruptcy on your credit report make it virtually impossible to buy a house? Not necessarily. However, your ability to qualify for a mortgage depends on several factors. In this blog, Ron Lunquist, Attorney at Law, explains what you need to know about buying a house after you file for bankruptcy.


There’s a Waiting Period to Qualify for a Mortgage

After you file for Chapter 7 bankruptcy, you’ll need to wait until the court either discharges or dismisses your case to qualify for new credit. In fact, it’s not uncommon for individuals to receive credit card offers shortly after the conclusion of their case. With mortgage loans, though, qualifying for new credit is a bit different.


When it comes to qualifying for a mortgage, you’ll need to prove you’re financially capable of taking on new debt and making regular payments toward that debt. That’s why, for Chapter 7 cases, there’s a two- to four-year waiting period after the bankruptcy discharge date to qualify for a home loan.


That said, mortgage lenders may be willing to decrease your waiting period under certain circumstances. If you can prove that your bankruptcy filing was the result of an extenuating circumstance and not because of poor financial management on your part, you may not have to wait as long. 


Qualifying for a Government-Backed Mortgage Loan After Chapter 7 Bankruptcy

If you’re not planning to put up a substantial down payment to buy a house, a government-backed mortgage loan is probably your best option. Here’s what you should know about qualifying for these loans after bankruptcy:


●        FHA loan. Federal Housing Authority loans are usually a good option for those with less-than-perfect credit scores and first-time homebuyers. These loans require a down payment of as little as 3.5% of the home purchase price, and they have a specific rule that may allow you to avoid the credit score requirement if you choose not to open new credit accounts after your bankruptcy. The waiting period for these loans is two years after the date of your bankruptcy discharge.


●        VA loan. Veteran’s Affairs loans are only for veterans, but if you’ve served in the military, they may be a suitable option. As with FHA loans, the waiting period to qualify for a VA loan is two years after your bankruptcy discharge date. These loans do not have a minimum credit score requirement and in some cases, they don’t require a down payment either.


●        USDA loan. United States Department of Agriculture loans are for individuals who’d like to buy a home in a rural area. They require a low down payment and in some cases, no down payment whatsoever. Typically, you’ll have to wait three years from your bankruptcy discharge date to qualify for a USDA loan. However, if you can prove your bankruptcy was the result of extenuating circumstances, you may only need to wait 12 months after your bankruptcy discharge to qualify for this type of loan.


Qualifying for a Conventional Loan After Chapter 7 Bankruptcy

What if you’re not interested in a government-backed mortgage loan? Can you still buy a house? Absolutely — provided you play your cards right. Lenders fully expect you to work on rebuilding your credit during the waiting period for conventional mortgage loans.


For Fannie Mae and Freddy Mac loans, the typical waiting period is 48 months. However, if you can prove extenuating circumstances led to your bankruptcy filing, you may only need to wait 24 months to start applying for a conventional home mortgage.


On the other side of the coin, if you’ve filed for bankruptcy multiple times in the last seven years, you’ll likely need to wait five years to qualify for a conventional home loan. If extenuating circumstances led to your most recent bankruptcy, lenders may be willing to reduce your waiting period to three years rather than five.


Schedule a Consultation With a Twin Cities Bankruptcy Attorney

If you’re considering filing for Chapter 7 bankruptcy, don’t hesitate to get in touch with Ron Lunquist, Attorney at Law. As one of Minnesota’s top bankruptcy lawyers, I’ve proudly served Twin Cities clients in their time of need for over 20 years. When you need expert bankruptcy guidance, I’m here for you too.


To learn more or get started with your case, request a free consultation today. You can also call my Eagan, MN office at 651-454-0007 or contact my team online, and we’ll be in touch promptly.