If you’ve recently gone through a bankruptcy, you may believe that buying a home is no longer an option. While it will take awhile to raise your credit and get your affairs in order, homeownership is a very real possibility for you. The first step is understanding your bankruptcy.
Buying After Bankruptcy
There are two common types of bankruptcy:
Chapter 7 bankruptcy discharges most of your debts (there are some exclusions such as Student Loans), though the court may require you to liquefy some of your assets to pay off debts. There are certain exemptions such as $21,625 for real estate used as a primary residence, $3,450 for a vehicle, the right to state or federal benefits, and domestic support benefits. You must pass an income eligibility test, ensuring that you make less than the official cap, in order to qualify.
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Chapter 13 bankruptcy does not require you to liquefy any of your assets to pay off creditors. This bankruptcy provides a 3-5 year period for you to pay some or all of your debt, which must be at least equal to what the creditors would have received in a Chapter 7 bankruptcy.
If you complete the repayment schedule, your unpaid unsecured debt will be discharged (with some exceptions). Bankruptcy can affect your credit score dramatically (sometimes dropping it up to 200 points), so consider your scores carefully before applying for a home loan.
Types of Loans You Can Get After Bankruptcy
There are several different loan options available to you after bankruptcy. Here are the basics so you can approach a mortgage lender well informed.
1: FHA Loans
Federal Housing Administration loans are fairly flexible and can benefit borrowers with lower credit scores and small down payments. FHA loans go up to $636,150 and may be approved after a bankruptcy if the borrower has re-established good credit, has good job stability, and qualifies financially.
The time period differs:
Chapter 13: Payments must be made satisfactorily for at least 1 year. The borrower must provide a full explanation of the bankruptcy.
Chapter 7: Must wait at least 2 years from the discharge date (not the filing date) of the borrower and/or the spouse’s bankruptcy.
2: Conventional Loans
Typically, conventional loans are used for borrowers with good or excellent credit. The limit for 2017 is $424,100 however there are some areas where that limit is higher. Conventional loans are possible after bankruptcy after the following conditions are met:
Chapter 13: Must wait 2 years from the discharge date or 4 years from the dismissal date.
Chapter 7: Must wait 4 years from the discharge date unless extenuating circumstances can be proven (like job loss), in which case it may be lowered to a 2 year waiting period.
3: VA Loans
Veterans Affairs loans are only available to active-duty military and veterans. They require no down payment and have no clear lending limit, however the VA has limits on how much liability they can assume. VA loans are more forgiving of bankruptcy.
Chapter 13: Borrowers can qualify one year after filing and 2 years after a foreclosure.
Chapter 7: Borrowers are eligible 2 years after bankruptcy discharge.
3 Steps to Buying a Home After Bankruptcy
If you have your heart set on homeownership after bankruptcy, here are a few steps to get you headed in the right direction.
1. Wait Until the Dust Settles
There is no benefit to stressing about homeownership during the bankruptcy process. Wait until the papers have all been finalized and you have a discharge date.
2. Get Your Budget Under Control and Save for a Down Payment
Bankruptcy is an opportunity to start fresh, a time to re-evaluate your lifestyle and budget. Get a handle on your finances and start squirreling money away for your down payment.
3. Prepare to Apply for a Loan and Shop for a House
Find a mortgage lender and a realtor that your trust and start looking at your options. Your lender can inform you about the different loans available and help you decide which one is right for you.
There is hope and homeownership after bankruptcy! Banks are still willing to work with borrowers who have filed in the past. Putting your finances back in order and seeking out proper representation will put you on the fast track towards saying “Home Sweet Home”.
