by Robin Goralka
Looking to purchase a home after bankruptcy can be a daunting prospect. Many people think that declaring bankruptcy will have a negative effect on their credit report for years to come, making it difficult to qualify for traditional loans. However, the good news is that this is not the case. One option is to apply for a loan through one of several government-insured programs offered by the Veterans Administration (VA), the Federal Housing Administration (FHA), or the US Department of Agriculture’s Rural Development program (USDA RD). In these loans, the government insures some of the debt against the lenders’ losses in the event of a default. This makes it less risky for lenders to approve the loan. This means that people who have emerged from bankruptcy with a history of responsible financial behavior to qualify for a home loan.
The requirements to qualify for a home loan after bankruptcy depend on the which chapter bankruptcy was filed. For chapter 13 bankruptcy, where the person has agreed to a plan to pay off all or part of their debts, the path to qualifying for one of these home loans lies in adherence to that bankruptcy plan. All three of these programs allow for people who have successfully completed their bankruptcy payments and discharged their debts to qualify for a loan. However, to qualify for a USDA loan, they must also show 12 months of willingness to meet financial obligations. The final 12 months of bankruptcy payments can be used to satisfy this requirement.
Even if someone is still in chapter 13 bankruptcy, they can still get a home loan through either the VA or the FHA. If the person gets approval from the Trustee or Bankruptcy Judge and has made on-time, in-full payments in accordance with their bankruptcy plan for the past 12 months, they can qualify for a home loan.
The timeframe of demonstrating responsible financial behavior after chapter 7 bankruptcy is longer than after chapter 13, but the VA, FHA, and USDA home loan programs all allow people who have filed for chapter 7 bankruptcy to qualify. For both VA and FHA loans, after two years the bankruptcy stops being a disqualifying factor in and of itself. For a USDA loan, people have to wait a little longer to qualify after discharging chapter 7 bankruptcy. They become eligible again after 36 months.
These programs also have an exception that allows someone who filed for chapter 7 bankruptcy to qualify for a loan in fewer than two years if they can explain and document how the bankruptcy was due to extenuating circumstances (such as a severe, sudden medical emergency). They must also have re-established good credit and shown a post-bankruptcy history of on-time payments.
Getting a home loan after bankruptcy with a low interest rate through the VA, FHA, or USDA is possible. It requires that the person show that they have acted responsibly with money and credit in the period following the bankruptcy for at least a year. This means building an established pattern of on-time payments and good credit management making it possible to qualify for a home loan. In these circumstances, rather than a permanently ruinous mark on a person’s credit, bankruptcy can be seen as a financial fresh start.
If you’re applying for a home loan after bankruptcy, FedHome Loan Centers can help.
Robin Goralka is the Assistant Editor for FedHome Loan Centers. She has an MA in Literature from UC Santa Cruz. Robin is putting her research and writing skills to work to help explain the ins and outs of the home loan process.