Is Buying a House After Bankruptcy Possible?

A bankruptcy proceeding can reduce or even eliminate your debts, but it will damage your credit report and credit score in the process, which can affect your ability to obtain credit in the future for things such as new credit cards, a car loan, and a home mortgage.

It is possible to buy a house after bankruptcy, but it will take some patience and financial planning. It is important to check your credit report regularly to make sure everything is there that should be—and nothing is there that shouldn’t be. You can start to rebuild your credit using secured credit cards and installment loans, making sure all payments are made on time and in full each month.

Understanding How to Buy a House After Bankruptcy

First Things First: The Bankruptcy Discharge

How long after bankruptcy can you buy a house? It varies. However, to even be considered for a mortgage loan request, the bankruptcy must first be discharged. A bankruptcy discharge is an order from a bankruptcy court that releases you (the debtor) from any liability on certain debts and prohibits creditors from attempting to collect on your discharged debts.

In simple terms, this means you don’t have to pay the discharged debts, and your creditors can’t try to make you pay. A discharge of your debts is just one step in the bankruptcy process. While it doesn’t necessarily signal the end of your case, it is something lenders will want to see. The court often closes a bankruptcy case shortly after the discharge.1 

Check Your Credit Report

Lenders look at your credit report—a detailed report of your credit history—to determine your creditworthiness. Although bankruptcy filings can remain on your credit report for up to 10 years, it doesn’t mean you have to wait 10 years to get a mortgage.

You can speed up the process by making sure your credit report is accurate and up to date. It’s free to check: Every year, you are entitled to one free credit report from each of the “big three” credit rating agencies—Equifax, Experian, and TransUnion.

A good strategy is to stagger your requests, so you get a credit report every four months (instead of all at once). That way you can monitor your credit report throughout the year. One of the best credit monitoring services could also be useful in this endeavor.

On your credit report, be sure to watch for debts that have already been repaid or discharged. By law a creditor cannot report any debt discharged in bankruptcy as being currently owed, late, outstanding, having a balance due, or converted as some new type of debt (e.g., having new account numbers). If something like this appears on your credit report, contact the credit agency right away to dispute the mistake and have it corrected.3

Other mistakes to look for:

• Information that is not yours due to similar names/addresses or mistaken Social Security numbers
• Incorrect account information due to identity theft
• Information from a former spouse (that should no longer be mixed with your report)
• Outdated information
• Wrong notations for closed accounts (e.g., an account you closed that appears as closed by the creditor)
• Accounts not included in your bankruptcy filing listed as part of it

If you want to qualify for a mortgage, you’ll have to prove to lenders that you can be trusted to repay your debts. After a bankruptcy your credit options may be fairly limited. Two ways you can start rebuilding your credit are secured credit cards and installment loans.

A secured credit card is a type of credit card backed by money you have in a savings account, which serves as collateral for the card’s credit line. The credit limit is based on your previous credit history and how much money you have deposited in the account.

If you fall behind on payments—something you should avoid at all costs, as you’re trying to prove you can repay your debt—the creditor will draw from the savings account and reduce your credit limit. Unlike most debit cards, the activity on a secured credit card is reported to the credit agencies; this allows you to rebuild your credit.

Installment loans require you to make regular payments each month that include a portion of the principal, plus interest, for a specific period. Examples of installment loans include personal loans and car loans. Of course, it goes without saying that the only way to rebuild your credit with an installment loan is to make your payments on time and in full every month. Otherwise, you risk damaging your credit even further. Before obtaining an installment loan, be certain that you will be able to service the debt.

The Right Timing

While you may qualify for a mortgage sooner, it’s a good idea to wait two years following the bankruptcy, as you’ll likely get better terms, including a better interest rate. Keep in mind that even a small difference on an interest rate can have a huge effect on both your monthly payment and the total cost of your home.

For example, if you have a $200,000 30-year fixed-rate mortgage at 4.5%, your monthly payment would be $1,013.37, and your interest would be $164,813, bringing the cost of the home to $364,813. Get the same loan at 4%, and your monthly payment would drop to $954.83, you’d pay $143,739 in interest, and the total cost of the home would drop to $343,739—more than $21,000 in savings because of the 0.5% change in interest.