Dear Penny: How Long Will a Bankruptcy Stand in the Way of Buying a Home?

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 [email protected].