How a Bankruptcy Filing Will Affect Your Home Purchase

How a Bankruptcy Filing Will Affect Your Home Purchase

Filing bankruptcy will not prevent you from ever owning a home, but it may delay homeownership a bit. Most debtors have to wait at least two years after filing for bankruptcy to get approved for a mortgage. 

Find out how you can approve your chances of getting approved for a mortgage in the years following your bankruptcy filing, from the office of a noted Philadelphia bankruptcy attorney

How a Bankruptcy Filing Can Affect Your Home Purchase

How Bankruptcy Affects Your Credit Score

Your credit score will affect your ability to obtain a mortgage. This is the case for anyone, not just people who have filed for bankruptcy.

After you file bankruptcy, the fact that you filed can remain on your credit report for up to ten years. However, when you receive your discharge your debt-to-income ratio will improve because your unsecured debt is wiped out. This is why debtors find that in the months following their bankruptcy, their credit score improves.

Sure-fire Ways to Improve Your Credit Score Following Bankruptcy
Pay your rent, utilities, and cell phone in full and on time each month to rebuild credit. You can also take out a $500 or $1,000 secured credit card and use that to build good credit. And although you will not be eligible for the lowest interest rates, taking out a car loan is another way to rebuild credit after bankruptcy filing.  

Do you want to buy a home, but filed for bankruptcy? If so here's how a bankruptcy filing will impact your next home purchase.#bankruptcy Click to Tweet

Obtaining a Conventional Loan After Bankruptcy

Conventional mortgages are private loans not insured by any government program. Instead of the government backing your loan, you will back it by purchasing private mortgage insurance. After paying the mortgage for some time and once equity in the property reaches 20% of the initial loan amount, you can cancel the mortgage insurance. 

Interest rates and credit score requirements are higher for conventional mortgages than for FHA loans and other government-backed loans. 

Chapter 13 debtors can obtain a conventional loan during their filing with the court’s permission, otherwise, both Chapter 13 and Chapter 7 debtors will be eligible for a conventional loan two years after the discharge order is entered. So for those wondering how long after chapter 7 can I get a conventional mortgage that’s the answer.

Obtaining an FHA Mortgage After Chapter 7 Bankruptcy

In most cases, a debtor must wait two years after entry of the discharge order before qualifying for a mortgage. However, if you had to file bankruptcy through no fault of your own, you may be able to reduce the waiting period to twelve months for an FHA loan, as long as you can demonstrate that you have handled your finances prudently since your bankruptcy case closed.

In contrast, if bankruptcy filing was necessary due to financial mismanagement, a debtor may have to wait 48 months before being approved for a mortgage. So if you’re wondering how long after a chapter 7 can I buy a house, the answer it depends on your individual circumstances.

Obtaining an FHA Mortgage After Chapter 13 Bankruptcy

Obtaining an FHA Mortgage After BankruptcyChapter 13 debtors may be able to qualify for an FHA loan during their three- or five-year Chapter 13 case, if:

  • They have paid at least 12 months of plan payments;
  • The bankruptcy court approves the debtor’s motion to purchase a home with an FHA loan;
  • The debtor can show that the reason filing Chapter 13 was necessary is unlikely to arise again.

If the debtor wants to purchase a home after completely funding the plan and receiving a discharge, they must wait 24 months.

If the debtor’s Chapter 13 case was dismissed, the debtor has to wait 48 months. 

Other Government Loan Programs That May Benefit Former Debtors

United States Department of Agriculture (USDA) Loan
The USDA issues loans to low-income and middle-income borrowers who wish to purchase real property in a rural area. A USDA loan has low interest and may require no down payment. 

Chapter 7 debtors are eligible for a USDA loan three years after their discharge order is entered. A Chapter 7 debtor who can show that the bankruptcy filing was not a result of financial mismanagement may be able to qualify for a USDA loan only 12 months following the entry of the discharge order.

A Chapter 13 bankruptcy filer can apply for a USDA loan after 12 months of successful plan payments and with the approval of the court.

Veteran’s Affairs (VA) Loan
The VA loan program helps veterans obtain housing. Some benefits of a VA loan include:

  • no down payment required;
  • no minimum credit score required (by the VA – lenders participating in the program may require it);
  • a generous allowance of seller credits and concessions compared with other types of loans, and;
  • unlimited lifetime use of the program.

If a debtor has two years of clean credit after bankruptcy, they may be approved for a VA loan. However, if a debtor loses a home financed through the VA in foreclosure, they will have to repay that debt before taking advantage of the program again.

How to Get the Lowest Interest Rate After Filing Bankruptcy

If you need to purchase a home after filing bankruptcy, it is best to wait at least two years following the entry of your discharge order, even if you might qualify for a mortgage sooner. Why? Because at that point, you will have built up your credit and you will be eligible for a much lower interest rate than had you not waited.

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Popular Bankruptcy Questions
Is bankruptcy bad for buying a house? A bankruptcy filing can have a negative impact on buying a house, as it often leads to a significant decline in creditworthiness. When someone files for bankruptcy, it stays on their credit report for several years, making it challenging to obtain a mortgage.

However, the impact of bankruptcy on buying a house is not absolute. Individuals can work towards rebuilding their credit over time in addition to saving for a down payment to improve their chances of obtaining a mortgage. Consulting with a financial advisor or a mortgage broker can provide guidance on the specific steps to take to recover from a bankruptcy filing and increase the likelihood of homeownership in the future.

How long do you have to wait to get a FHA loan after bankruptcy? After filing for Chapter 7 bankruptcy, individuals typically need to wait at least two years before they can become eligible for an FHA loan. However, this waiting period can be reduced to one year if the bankruptcy filing was due to circumstances beyond their control, such as medical issues or a job loss.

For Chapter 13 bankruptcy, borrowers may be able to qualify for an FHA loan during the repayment period with court approval and consistent payment history. It’s important to note that meeting the waiting period requirement alone does not guarantee loan approval, as lenders consider other factors such as credit score, income stability, and overall financial health. Working on rebuilding credit and maintaining a solid financial standing during the waiting period can increase the chances of obtaining an FHA loan.

What happens to your mortgage when you file bankruptcy? When you file for bankruptcy, the treatment of your mortgage depends on the type of bankruptcy filing. In Chapter 7 bankruptcy, your mortgage debt may be discharged, relieving you of the obligation to repay it. However, this typically means that you would have to surrender the property to the lender. If you want to keep your home, you may be able to reaffirm the mortgage debt, which means you agree to continue making payments and retain ownership of the property.

In Chapter 13 bankruptcy, your mortgage debt is included in the repayment plan, allowing you to catch up on missed payments and potentially reduce the interest rate or extend the loan term. It’s important to consult with a bankruptcy attorney to understand the specific implications of bankruptcy on your mortgage and explore the best course of action based on your circumstances.

About the Author

Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.

Looking to buy a home in South Florida after a bankruptcy filing? If so contact Michelle Gibson today! She has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Areas of service include WellingtonLake WorthRoyal Palm BeachBoynton BeachWest Palm BeachLoxahatcheeGreenacres, and more.

How a Bankruptcy Filing Will Affect Your Home Purchase

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