Advertisement
  1. Business

Dear Penny: How long will a bankruptcy stand in the way of buying a home?

[Getty Images]
Published May 20

Dear Penny,

In 2011, I declared Chapter 7 bankruptcy. Since then, I've obtained three new credit cards and pay the balance in full. My credit score is now 742.

How long will the bankruptcy stay on my credit report to hold me back from buying a new home?

-S.

Dear S.,

There's a common myth that it's impossible to rebuild your credit while your credit reports are still scarred by a bankruptcy — and you've proven it wrong.

You've re-established credit. You've managed it responsibly. Now, you have a pretty darn good score to show for it, even with a bankruptcy in your file.

But there seems to be a different misconception implied in your question: that it's impossible to buy a home while a bankruptcy is still on your credit report. This, too, is a myth.

I think you have two questions here: How long will a bankruptcy stay on your credit report? And will a bankruptcy hold you back from buying a home?

Let's start with how bankruptcy affects your credit. A bankruptcy is one of the ugliest battle wounds you can have on your credit report, but you didn't need me to tell you that.

And the effects are long-lasting. A Chapter 7 bankruptcy — the kind where many of your assets are liquidated and you emerge with no debt obligations — stays on your credit report for 10 years after you file. A Chapter 13 bankruptcy, in which you repay a portion of your debts, will fall off your reports after seven years.

The effect of bankruptcy on your credit score is most acute in the year or two after you file. But as you build a positive credit history, it matters less and less. The fact that your score is at 742 suggests your credit has already recovered significantly.

But will that be enough to overcome a bankruptcy when you try to buy a home? You don't say whether you've actually been denied for a mortgage or if you're waiting for the bankruptcy to drop off your report before applying.

To qualify for a conventional loan (the kind that isn't insured by the government) after filing Chapter 7 bankruptcy, you'll typically have to wait four years after the bankruptcy is discharged. For nonconventional loans (the ones that are backed by the government, such as FHA or USDA loans), the requirement is usually two or three years.

You're long past the required waiting periods, but keep in mind that these are just minimums. Every lender has different requirements.

If you do forge ahead now, be prepared to document your finances and how you've managed credit since filing bankruptcy in painstaking detail. Making a large down payment could help you get approved, but you should still be prepared for higher interest rates.

If there were extenuating circumstances that factored into the bankruptcy, like a job loss or illness, providing a letter of explanation with supporting documents could help you get approved.

But even if you can't get a mortgage on the terms you want, remember: Ten years is a long time, but you're so close to the end. In another two years or so, your bankruptcy should automatically be deleted from your file.

When you do reach the 10-year mark, you can verify that the bankruptcy has been removed by obtaining a free copy of your credit report from each of the three bureaus at AnnualCreditReport.com. If it still appears, you can request that they remove it stat.

Bankruptcy may seem like a scar on your credit report, but it isn't permanent. Because time heals both old wounds — and derogatory credit marks.

Robin Hartill is a senior editor at the Penny Hoarder and the voice behind Dear Penny. Send your questions about rebuilding credit to AskPenny@thepennyhoarder.com.

ALSO IN THIS SECTION

  1. Philanthropist David Straz Jr. and his wife Catherine celebrate in March after he advanced into the Tampa mayoral run-off election. Mr. Straz has died at the age of 77. TAILYR IRVINE  |  Times
    The former mayoral candidate who lost to Tampa Mayor Jane Castor earlier this year, died Monday while on a fishing trip in Homosassa. His name, and legacy, are integral to Tampa.
  2. The Chick-fil-A on Dale Mabry in South Tampa. The company announced Monday it will no longer donate to The Salvation Army and the Fellowship of Christian Athletes.
    The groups have faced criticism for their opposition to same-sex marriage.
  3. Candice Anderson, left, and Alsace Walentine, co-owners of Tombolo Books, rearrange books as attendees of the Times Festival of Reading leave the University Student Center behind them. [Jack Evans | Times]
    The shop plans to open next to Black Crow on First Ave. S before the new year.
  4. An opened capsule containing Kratom. The Clearwater City Council was confronted by dozens of concerned citizens at a recent meeting who urged them not to ban the herbal supplement. Times
    “Our recommendation right now is, we don’t think there’s a need to regulate it.”
  5. BayCare Health Systems now plans to build a $200 million, 60-bed hospital along Bruce B. Downs Boulevard. The company previously planned to build on 111 acres further north adjacent to Interstate 75 and an interchange to built at Overpass Road. Shown his the main entrance to BayCare's St. Joseph's Hospital North on Van Dyke Road in Lutz. Times
    BayCare plans a $200 million, 60-bed hospital on land it owns along Bruce B. Downs Boulevard
  6. Damian J. Fernandez, center, is introduced Monday as the new president of Eckerd College. He will succeed longtime president Donald R. Eastman III on July 1. SCOTT KEELER  |  Tampa Bay Times
    Damian Fernandez, 62, will succeed president Donald R. Eastman III, who steps down June 30 after leading the school for 19 years.
  7. [Getty Images] FLUXFACTORY  |  Getty Images
    Under the circumstances spelled out here, the advice columnist says Mom has few desirable options.
  8. Dusty Hill (left) and Billy Gibbons (right) from ZZ Top perform prior to Tom Petty & the Heartbreakers at the St. Pete Times Forum in 2010. A ZZ Top concert in 2018 was the subject of a scathing Clearwater city audit of the Parks and Recreation Special Events division. KEVIN HOWE  |  Times archives
    The Parks and Recreation Department failed to keep sales receipts, invoices and other records of a 2018 concert.
  9. Dade City wants to put its planned bicycle hub in a city park near Church and Eighth streets adjoining the trailhead of the Roy Hardy Trail. The land already has been designated as the future home of a splash pad. Dade City
    A planned welcome center for cycling enthusiasts originally had been slated for a historic train depot
  10. Frances Werner-Watkins Julie Rinaldi
    News and notes on local businesses
Advertisement
Advertisement
Advertisement