Filing for bankruptcy is often the only chance you have when it comes to getting the proper debt relief. Of course, going through bankruptcy to restart your financial life is never a fun process. Since you likely haven’t been making payments on time, chances are, your credit report needs some serious work.
With a recent bankruptcy on your credit report, even getting a credit card can be challenging. There are other obstacles you’ll run into, such as securing personal loans after bankruptcy for medical bills or having only limited mortgage options. This might leave you wondering: you can buy a house after bankruptcy?
You can (but there are a few catches!). Let’s take a look to find out which options will be available to you.
Credit After Bankruptcy
Filing for bankruptcy can wreak havoc on your financial record, even if you began with excellent credit. You’ll see your credit score instantly drop by 100, 150, or even 200+ points!
Having bad credit makes securing most types of loans impossible, leaving you with a limited pool of private lenders to work with. Unfortunately, many of the private loans available to those with a low credit rating are APR nightmares, complete with a high monthly payment.
For example, let’s take a look at the rates from OppLoans, a company that offers private loans to those with bad credit. Although your loan application may be approved, the loan likely won’t be worth the debt you’ll incur. The ARP loan terms from OppLoans vary widely, from as little as 59% to as high as 160%!
Let’s say you had $10,000 in medical debt that you wanted to finance over three years. With an APR of 160%, you’d end up paying $48,536.03. Out of this total, only $10,000 is the amount financed; the remaining 38,536.03 is all interest!
To avoid filing for bankruptcy again in the future, it’s vital that you avoid taking out these types of high-interest loans with exorbitant payment requirements. Similarly—once you secure a mortgage—it’s important to make sure your monthly mortgage payment amounts are sustainable long-term.
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Can you buy a house after bankruptcy, or do you have to wait?
First, you’ll need to wait for your bankruptcy attorneys to get everything in order. Directly after you’ve received a bankruptcy discharge, you won’t be eligible for any type of mortgage.
You’ll need to wait a little bit before you can secure a mortgage. How long you’ll need to wait depends entirely on your type of bankruptcy filing. Let’s take a look at how filing for different types of bankruptcy can affect your financial timeline.
Chapter 7 Bankruptcy
The applicable waiting period for getting a loan after chapter 7 bankruptcy depends on the type of mortgage you’re attempting to finance. To qualify for loan programs offered by private mortgage companies, you’ll need to wait at least 4 years before filing a mortgage application.
However, you’ll be eligible for government-owned loans before you’re eligible for private loans. USDA loans require you to wait three years; there’s a two-year waiting period for FHA and VA loans.
Chapter 13 Bankruptcy
The legal process is a bit different for Chapter 13 bankruptcies, and so is the waiting period. How long you’ll have to wait to get a loan after Chapter 13 bankruptcy depends on whether your bankruptcy is dismissed or discharged.
- If your bankruptcy is dismissed, then there’s a four-year waiting period before you can apply for a conventional mortgage.
- If your bankruptcy is discharged, then you’ll need to wait four years from your filing date & two years from your credit pull before applying for a conventional mortgage.
Fortunately, securing a government-backed loan won’t take as long. USDA loans require a 1-year waiting period; you’re eligible for FHA and VA loans immediately after the bankruptcy is dismissed or discharged!
The Long-term Credit Effects of Bankruptcy
The bankruptcy process is extremely detrimental to your credit, staying on your credit report for 7 (Chapter 13) or 10 (Chapter 7) years after the filing date. As mentioned above, this will severely limit the loan type, terms, and APR you’re eligible for. You likely won’t meet the minimum credit score requirement for many loans.
Even if you do meet their credit requirements, it’s essential to avoid creating unnecessary credit accounts after filing bankruptcy. If you do anyway, this is a great time to build proper credit habits. Never finance more than you can afford with your monthly, and avoid making late payments.
Build Credit While Waiting
Paying your bills on time is important. You can help improve your credit history with on-time payments, but most of your bills don’t affect your credit score. Fortunately, there are credit lines designed specifically for this purpose.
Opening a secured credit card will allow you to improve your credit without needing to apply for conventional loans. Unlike the unsecured debt of personal loans or traditional credit cards, secured cards only give you a credit limit based on your deposit amount.
Essentially, they are debit cards that function as credit cards! Using a secured card will help you prevent excessive credit card debt, as your initial limit won’t be higher than the amount you can afford to deposit.
These credit card companies still report your payments to the credit bureaus, which allows you to build your credit up towards future loan approval and more affordable mortgage payments.
If you’re hoping to finance a house after bankruptcy, you must improve your credit before you can start looking at the different types of mortgage loans.
A Way to Build Your Wealth
If you can afford it, investing is a great way to amass wealth while waiting for the waiting period to pass. Although—during the waiting period—you won’t be eligible for a mortgage, that doesn’t prevent you from making a property investment!
You can begin investing in real estate using services such as Fundrise for as little as $500! If you have a bit more in the bank, Yieldstreet is an option that historically offers investors a 9.71% net annualized return.
Online crowdfunding services like these allow you to start making property investments with ease. These types of investments often yield great returns over 5+ years, aligning perfectly with the mandatory waiting periods and setting you up for success.
Can You Buy a House After Bankruptcy?: What We’ve Learned
Yes, you can buy a house after bankruptcy, but it takes effort, time, and planning. You’ll need to open multiple lines of credit, establish a positive credit history, and stay within your credit limit to improve your credit.
Once the mandatory waiting periods have passed and you’ve established an excellent credit score, you’ll be able to secure a much lower monthly mortgage payment. Although this process is quite time-consuming, it’s worth the wait. Build your credit, invest appropriately, and save when possible; you’ll be able to finance your next home soon enough!