Can I Buy a House after Filing for Bankruptcy?

Can I Buy a House after Filing for Bankruptcy?

You may not realize it, but you may be able to get back into homeownership faster than you think after filing for bankruptcy. How long you have to wait to be able to obtain a mortgage may depend on the type of bankruptcy, where you get your loan, and how you handle money in the future.

Chapter 7 Bankruptcy

Chapter 7 means most, if not all, of your debts are cancelled. You may be required to liquidate some of your property to satisfy the creditors. The debtor does not have to file a repayment plan.  

After your filing, it may take up to six month to complete the bankruptcy process. You may be sent to credit counseling and a bankruptcy trustee will oversee that your creditors are paid as much as possible.

Meanwhile, with a stay in place, most creditors cannot collect what you owe them. 

After you file your Chapter 7 bankruptcy, you will likely need to wait at least two years from the discharge date to begin the process of obtaining a home loan, unless your loan is co-signed by a close relative or friend. The discharge date occurs when the court sends out discharge paperwork, around the time your case closes.   

The waiting period will be longer if your mortgage was foreclosed during the bankruptcy process. Regardless, you will have to be pre-qualified if you are considering obtaining a loan.  

It will be vital that you work on restoring your credit score, which has been lowered due to the filing. You must prove you have stabilized the financial situation that led to the bankruptcy. You may choose to re-establish your credit by opening, and paying on-time, new credit cards.    

Keep an eye on your credit score for free by checking www.annualcreditreport.com.

If you do work on improving your credit score, there may be some options to new home ownership within a couple years or so after your bankruptcy.

FHA Loan

A Federal Housing Authority (FHA) loan is an attractive option because it is geared toward buyers who have little to put down, as little as 3.5% of the purchase price.

The down payment is partially dependent on your credit score – the lower the score, the more down payment is required.  

USDA Loan

Want to buy a home in the country? A Department of Agriculture (USDA) loan might make home ownership possible. The applicant will have to wait three years after the bankruptcy discharge to apply. 

Chapter 13 

It takes longer to wait for home ownership after filing a Chapter 13 bankruptcy. Because some debtors do not qualify for a Chapter 7 bankruptcy, they may be forced to choose Chapter 13, which allows you to keep more of your property as long as you make regular payments.

The entire process can take three to five years during which time the debtor may be expected to repay some of his/her debts.

After about a year, if the individual has been making regular payments, he/she may be able to obtain an FHA loan. The court will make sure the person can handle a mortgage payment as well as adhere to the debt payment plan.  

VA Loan

For either type of bankruptcy, a Veteran’s Affairs loan could help put you back on the path to home ownership. A VA loan is available only to veterans and generally requires no down payment. After the bankruptcy is discharged, your credit history will be considered, however, a low credit score may disqualify you. 

Conventional Loan

A convention loan is always worth checking into, but you may need to wait two to four years after the bankruptcy is discharged. If you have a small down payment, you may have to pay private mortgage insurance (PMI) every month, and the interest rates and credit score requirements will be higher with a conventional loan.

Your credit score before bankruptcy may be a deciding factor on when and how soon after bankruptcy one can apply for a mortgage.

It is essential that you have a realistic picture of your new post-bankruptcy budget before buying a new home, taking into account all of the payments and debt that will not be discharged.

If you think you may be in the market for homeownership after filing for bankruptcy, our attorneys at Haygood, Cleveland, Pierce & Thompson will be able to guide you through the bankruptcy process and help ensure that you are positioned to obtain a new home in the shortest possible period of time after your bankruptcy is completed. Contact us today at 334-731-7693 for a consultation.

Sources:

NOLO Press on Credit after bankruptcy
https://www.nolo.com/legal-encyclopedia/improving-credit-after-bankruptcy

US Courts
https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics

Federal Bankruptcy Code on Chapter 7.
https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics