Bankruptcy does temporarily result in a drop in someone’s credit score and a mark on their credit report. Of course, having a single, major negative mark on a credit report can actually do less harm than having multiple judgments and past-due accounts visible to lenders. Still, the limitations that bankruptcy temporarily creates on someone’s future credit opportunities can make people delay filing even though they know they can’t control their finances without outside intervention.
Some people claim that those who file for bankruptcy won’t be able to buy a house in the future. While it is generally true that bankruptcy diminishes someone’s credit opportunities temporarily, the impact won’t be permanent. There will simply be a period of time wherein a filer cannot take out a new mortgage.
It depends on the type of loan
After a successful bankruptcy filing, the credit bureaus will maintain a record of an individual discharge. The bankruptcy will be a noticeable negative mark for seven years after a Chapter 13 discharge and 10 years after a Chapter 7 discharge. However, people don’t need to wait until the bankruptcy comes off of their credit report to purchase a home.
What matters the most is the perspective of the lender and how they’ve used credit since their discharge. For some loan programs, there is a mandatory waiting period after bankruptcy. Those looking to qualify for certain government-regulated financial instruments, including FHA or VA loans, will have to wait a set amount of time after their discharge before they can qualify for a home loan.
Those who file for Chapter 7 bankruptcy will have to wait at least two years for VA or FHA loans and three years after their discharge for a USDA loan. Those who file for Chapter 13 bankruptcy will generally have to wait one year to be eligible.
For private financial institutions, the two-year mark after discharge is often when lenders are open to underwriting a mortgage again after an individual’s bankruptcy filing. For many people, a successful bankruptcy will make it easier for them to qualify for a mortgage and make their monthly payments moving forward. Understanding how long it will take to be eligible for a mortgage after bankruptcy can help someone plan their future while they’re preparing to file.