The Short Answer
You can finance a home after bankruptcy — the question is how soon and at what rate. Most people can qualify for an FHA loan as little as two years after filing, though conventional loan timelines run longer depending on whether your bankruptcy involved a foreclosure, short sale, or deed-in-lieu. The more time you spend rebuilding your credit between your filing date and your mortgage application, the better your interest rate and terms will be. If a foreclosure was part of your situation, Fannie Mae and Freddie Mac impose waiting periods of two to seven years depending on the circumstances.
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Many people assume that because they have had poor credit and needed to file bankruptcy to get their fresh financial start that their ruined credit will prevent them from financing and purchasing a home. That is not necessarily the case but certain factors will affect the ease and timing of a new home purchase.
The Waiting Period
Bankruptcy will remain on your credit report for up to ten years but that doesn’t mean you have to wait that long to finance a new home. Through the thousands of cases that we have filed over the years we have seen numerous clients be able to purchase a new home as little as two years after filing bankruptcy. However, that doesn’t necessarily mean that you will get the best rates for your mortgage so soon after bankruptcy. Generally, you can get good rates after four years depending on whether you experienced a foreclosure, deed-in-lieu of foreclosure, or a short sale of your previous home.
The FHA requires as little as 3.5% down after two years to qualify for a loan. Some lenders may even qualify you just six months after bankruptcy but will do so with a higher interest rate and down payment. Fannie Mae and Freddie Mac, the two privately owned companies who dominate 90% of the conventional mortgage industry and are heavily regulated by HUD, have a variety of waiting periods based on various factors. If extenuating circumstances exist such as job loss, serious illness, severe injury resulting from an accident, or death, Fannie Mae and Freddie Mac’s waiting period is 3 to 7 years after foreclosure. Without extenuating circumstances, the waiting period is 5 to 7 years to obtain a conventional loan. If you want to buy after a deed-in-lieu of foreclosure (the exchange of the deed to your house for a considerably smaller sum than what it would cost the bank to go through a lengthy and expensive foreclosure process) the waiting period is 4 to 7 years or 2 to 7 years with extenuating circumstances. You must wait two years after a short sale, i.e. your lender agrees to the sale of your home for less than you owe on the note. Your new home purchase must be a principal residence, not a vacation or rental home.
Improving Your Qualification for Financing a New Home
Bankruptcy, foreclosure, deed-in-lieu of foreclosure, and short sales will have a negative impact on your credit score. Anyone who tells you otherwise isn’t telling you the whole truth. However, you can use the time between filing your bankruptcy an getting a new mortgage to rebuild your credit which, in turn, will improve your financing options.
If your credit reports shows open and overdue balances, contact all three credit reporting agencies and insist that your debt be shown as included (and therefore wiped out) in the bankruptcy. Make sure any other errors on your report are also corrected.
You might want to get a secured credit card, which gives you a credit limit equal to the amount you deposit in the bank. It may only be a $200-$500 limit but it erases any danger of running up your card to uncontrollable levels. Pay your credit card bill every month on time and often the secured credit card can be converted to an unsecured card in 12-18 months for good credit behavior.
Installment loans can help rebuild your credit too. Be prepared for very high interest rates on vehicle loans at first but they can also be refinanced within a few years of good credit behavior. Also, student loan (not discharged in bankruptcy) repayment can be another good way to restore your credit by paying them on time.
For more information on how to rebuild your credit after bankruptcy review our 6 Steps to Rebuilding Credit After Bankruptcy blog post series. This will be important to helping you reestablish your credit so that you can achieve the best financing rates possible for your new home purchase.
Key Takeaways
- FHA loans require as little as 3.5% down and can be available just two years after bankruptcy, making them the most accessible path to homeownership post-filing.
- Conventional loans through Fannie Mae or Freddie Mac carry waiting periods of two to seven years after foreclosure, depending on whether extenuating circumstances like job loss or serious illness apply.
- A short sale typically requires a two-year wait before you can obtain a new mortgage, while a deed-in-lieu of foreclosure carries a four- to seven-year wait without extenuating circumstances.
- Some lenders will approve you as soon as six months after bankruptcy, but expect a significantly higher interest rate and larger down payment requirement.
- Disputing inaccurate balances on your credit report after bankruptcy — insisting discharged debts are reported as included in the bankruptcy — is one of the fastest ways to protect your credit score.
- Secured credit cards and on-time installment loan payments are practical tools to rebuild credit in the years between your bankruptcy discharge and your new home purchase.
Attorney Insight
The mistake I see most often is clients assuming they need to wait a full ten years — because bankruptcy stays on your credit report for ten years — before they can even think about buying a home. That misconception costs people years of homeownership they could have had. In reality, the clients I've seen move fastest toward a new mortgage are the ones who start rebuilding credit intentionally on day one after discharge: securing a card, paying installment debt on time, and cleaning up their credit report immediately. The clients who wait to start rebuilding until they want to buy a house almost always discover they pushed their realistic purchase date back another two to three years unnecessarily.
