Will I be able to buy a house after filing bankruptcy?

The answer depends on what you do post-bankruptcy.

Rebuild your credit

You’ll need to build a positive payment history after the bankruptcy and raise your credit score. If you have secured debt (house note, car notes)  that you continue to pay on time after the bankruptcy, the payments will be reflected on your credit report and help you rebuild your credit score.

You may have unsecured debt you will have to pay after bankruptcy. The most common unsecured debts you will pay after a bankruptcy are student loans.  If you pay these on time post-bankruptcy, those payments will be listed on your credit report and help boost your credit score.

Many of our clients tell us that they start getting credit card offers about 90 days after their bankruptcy discharge. These will usually have high interest rates and low credit limits, but they are way to start building a post-bankruptcy positive payment history. Be careful. This only works if you make your payments on time and you carry balances below one-third of your available credit limit.

Wait the necessary time periods.

Usually, you will need to wait 2-4 years before you can obtain financing to buy a new home.  The time periods to qualify for a mortgage post-chapter 7 discharge: 

Conventional mortgage – four years       

FHA mortgage – two years        

FNMA (Fannie Mae) and FDMC (Freddy Mac) – four years

  VA loans – two years

All the time periods are cut in half if there were extenuating circumstances causing you to file bankruptcy – unforeseeable substantial reduction in income or extreme increase in expenses due to job loss due to downsizing, death of a breadwinner, or medical expense.  A divorce is not considered an extenuating circumstance.

Save a downpayment

If you have a home before you file a bankruptcy, you can sell it after, and the net proceeds after paying off the mortgage are protected from your pre-bankruptcy creditors. The more money you have for a down payment, the more it will increase your chances of qualifying for a new mortgage with a lower interest rate.  If you don’t have a home to sell after your bankruptcy, you will need to save for a down payment. The amount required is generally controlled by federal regulations.  FHA requires (1) a down-payment of at least a 3.5%  down payment if your credit score is 580 or higher and at least 10% if it is 500- 580 and (2) that you not have incurred new debt.  VA does not require a down payment as long as the sales price isn’t higher than the appraised value and there is not minimum credit score, although some lenders require a credit score of 620.  Your credit score will also impact the interest rate your mortgage company will charge. 

Short version – you need to build positive credit history after your discharge (the more “credit lines” the better), raise your credit score and save up for a down payment.  Then you may qualify for a mortgage as short as two years after your discharge – perhaps one year if you can show extenuating circumstances.

Michael Baumer

baumerlaw@baumerlaw.com

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by Michael Baumer