Buying a home is an important step for many Americans. However, a credit card debt, student loans, or a medical emergency can quickly erase any savings that were supposed to be used for a down payment. Instead of continuing to fall deeper into debt, bankruptcy can be a way to eliminate your debt and get a new start.
Some people worry about their ability to buy a house later down the road after filing for bankruptcy. Even though a bankruptcy will remain on your credit report for years, you may be able to qualify for a home loan sooner than you thought.
Bankruptcy and Your Credit Report
A credit report is put together by a credit bureau company to provide a picture of an individual's creditworthiness. The primary major credit reporting agencies in the U.S. are Equifax, Experian, and Transunion. These private companies collect information about an individual, including:
- Identifying information,
- Credit account information,
- Outstanding debts,
- Debt repayment history,
- Credit cards, student loans, mortgages, vehicle loans,
- Collections actions and past-due accounts, and
Lenders and creditors may review your credit report to determine whether to offer a loan or extend credit, credit interest rates, and other terms of credit. This includes mortgage companies deciding whether or not to approve you for a mortgage, and the points, minimum payment, and interest rate of the mortgage.
A bankruptcy is one of the most significant indicators on a credit report. It shows that the individual amassed debt and had that debt discharged, leaving lenders and creditors without full repayment. A prior bankruptcy can be a warning sign to lenders that the person who filed for bankruptcy may be a credit risk and lenders will want to wait to see a couple of years of improved credit before considering credit or loans.
- Chapter 7 bankruptcy will remain on your credit report for ten years.
- Chapter 13 bankruptcy will remain on your credit report for seven years.
How Long After a Bankruptcy Can I Get a Home Loan?
There may be a number of factors that determine how long after a bankruptcy you will be eligible for a home loan and how long you may want to wait before applying for a home loan. In addition to the passage of time, other factors may include:
- Spouse's credit report,
- Type of bankruptcy,
- Current income and financial information,
- Amount of the loan,
- Length of the loan,
- Type of property involved, and
- Other factors.
Two Years After Bankruptcy
For the first few years, you should focus on rebuilding your credit and budgeting. If you keep paying down any non-dischargeable debt or have all major debt discharged, you may be able to start saving for a down payment. The general rule for a loan is to be able to put down 20% as a down payment for purchasing a home. For a $200,000 home in Missouri, a 20% down payment would be $40,000.
The minimum amount of time after a bankruptcy before lenders will consider a home loan may be two to four years. Even if a lender does approve a loan for someone shortly after bankruptcy, the terms of the loan may not be ideal. Waiting may give the borrower more time to continue building their credit score and saving more money for a down payment.
Four Years After Bankruptcy
Four or five years after a bankruptcy discharges your debt, enough time may have passed that your credit report can provide a better picture of your current financial situation. Your credit may even be high enough to fall into the good credit score range (700-749). Some things you may be able to do to improve your score post-bankruptcy, include:
- On-time payments,
- Making student loan payments,
- Credit-builder loans,
- Being added as an authorized user on a relative's credit card account,
- Adding secured credit cards or retail cards (depending on the terms) and paying off balances, and
- Keeping your credit card balances under 30% utilization.
Four or five years after a bankruptcy, you may be able to apply for a home loan and get an approval for a mortgage with good loan terms.
Seven Years After Bankruptcy
After seven years from the date of discharge, the record of your Chapter 13 bankruptcy should automatically be removed from your credit report. For most purposes, your creditworthiness will be based on your current financial situation and not take into account a bankruptcy that occurred seven years ago.
Ten Years After Bankruptcy
After ten years from the date of discharge, the record of your Chapter 7 bankruptcy should automatically be removed from your credit report. For most purposes, your creditworthiness will be based on your current financial situation and not take into account a bankruptcy that occurred ten years ago.
If you apply for a home loan ten years after bankruptcy, the approval and terms of the loan will be based on your current credit score. A high credit score will have a greater chance of approval and at preferred rates. However, a low credit score, even without a bankruptcy, may make you ineligible for a loan or eligible at higher interest rates.
Missouri Bankruptcy Lawyer
If you have questions about filing for bankruptcy in Missouri, contact the Joshua Wilson Law Firm in Raymore today. Contact us online or by calling (816) 331-9968. We maintain a virtual capable law office to keep you and your family safe.