Is buying a house after bankruptcy possible? If you’ve filed for Chapter 7 or 13 bankruptcy, you might be asking this question.
Buying a house requires a major investment which typically includes a mortgage, credit checks, and a lot of other steps. Each of these can be impacted by filing for bankruptcy. But if you’re one of the millions of Americans who have filed for bankruptcy – don’t panic!
Buying a house after bankruptcy IS possible, but there are certain things you need to know first.
Buying a house after bankruptcy
Chapter 7 and Chapter 13 bankruptcy are the two most common forms of consumer-based bankruptcy. The type of bankruptcy you’ve filed for will play a role in your ability to buy a house after.
Let’s discuss both types and how they will affect buying a house after bankruptcy.
Chapter 7 bankruptcy
An individual can file for Chapter 7 bankruptcy for total forgiveness of unsecured debts (i.e., those not secured by underlying assets) in some cases. But, they have to meet certain income requirements to do so. Unsecured debts could include credit cards or medical bills.
Importantly, not all property is protected under Chapter 7 bankruptcy, which means it could be sold to pay back creditors. In 2005, amendments to the Bankruptcy Code made it more difficult to file for Chapter 7 bankruptcy, meaning more people have had to file for Chapter 13 bankruptcy instead.
How do you know if you’re eligible for Chapter 7 or 13 bankruptcy? There are a number of factors that will determine which chapter is right for you. Among those factors is the means test.
The means test is bankruptcy form in which you disclose your income and expenses. However, the income disclosed is based upon an average of your last six months of paystubs. And, the expenses are a combination of IRS standard expenses for households of a similar size in your state and your actual expenses. As a result, the means test is a complicated disclosure form. It is best completed with the assistance of an experienced bankruptcy attorney at your side.
Are you interested in learning more about the means test? We discuss it in further detail in this blog post.
Chapter 13 bankruptcy
There are a number of reasons you may file a Chapter 13 Bankruptcy instead of a Chapter 7. For instance, you are behind on your house payments and want to cure the delinquency by filing a Chapter 13 case.
Chapter 13 Bankruptcy is a repayment plan for a minimum of 3 years but no more than 5 years. Your Chapter 13 Plan may result in unsecured creditors being paid in full or pennies on the dollar depending your circumstances. Your assets and income impact how much or little must be paid to unsecured creditors. However, certain creditors must be paid in full in Chapter 13. Child support debts must be paid in full. In addition, some secured debts like car and motor cycle loans must paid in full in Chapter 13. And some tax debts must be paid in full in.
No matter which type of bankruptcy you file, it will be reported to the credit bureaus and remain on your credit history for up to 10 years. Even after that time has passed, your bankruptcy case could still be reported if you apply for a job, or for a personal loan like a car loan or student loans.
But what about buying a house after bankruptcy? What are the wait times you’re subjected to and how do they differ when it comes to conventional loans and government-backed loans?
Home Buying after bankruptcy: loan wait times
If you’ve filed for Chapter 7 or Chapter 13 bankruptcy, you’ll be subjected to certain wait times for filing a conventional loan. Understandably, this can get in the way of buying a house.
Conventional loans are often sold to either the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). They each have borrower guidelines in place for the mortgages they’ll buy. Furthermore, they differ between Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 Case:
Did you file for Chapter 7 bankruptcy for reasons out of your control? In that case, you’re subjected to a 24-month wait period before you can apply for a conventional loan. If it was due to your financial mismanagement, however, you’ll need to wait 48 months until you’re eligible.
Chapter 13 Case:
For a Chapter 13 case, you’ll need to wait 24 months after discharge to be eligible for a conventional loan. If your case was dismissed in bankruptcy court without discharge, you’ll need to wait 48 months instead. If you’re able to prove that you filed your bankruptcy case under extenuating circumstances, this could again be reduced to 24 months.
What if you’ve filed multiple bankruptcy cases? Again, this changes things. If you’ve filed more than one bankruptcy case in the last seven years, you’ll have to wait five years to be eligible for a conventional loan. If you can prove extenuating circumstances, this could be reduced to three years.
As long as these time periods might seem, they’re still less than the seven-year waiting period Fannie Mae requires after a foreclosure. With a Fannie Mae loan, you’re also expected to keep working toward repaying your debts during the waiting period for a loan.
The two most common forms of government-backed loans for home buying are FHA (Federal House Administration) and VA loans. You’ll typically apply for one of these if you don’t have the money for a substantial down payment for buying a house.
Rather than making loans itself, the FHA guarantees loans from private lenders, often for first-time homebuyers or those with less than ideal credit (including those who have filed for bankruptcy). In addition to a waiting period like the conventional loans required, you’ll also need to meet a certain credit score to qualify.
Chapter 7 Case:
Two years after your Chapter 7 case was discharged, the FHA could consider you for a mortgage. You’ll also need to show you don’t have major marks on your credit, and that you’ve shown a positive credit history during the waiting period. However, if you don’t have any credit score to show, this doesn’t necessarily disqualify you.
In the event the Chapter 7 case was out of your control (i.e., a major catastrophe, medical issues, death of a spouse), the waiting period could be reduced to 12 months. You’ll also need to demonstrate that you’ll be able to make mortgage payments.
Chapter 13 Case:
Provided you’ve made your payments on time, you could be approved for an FHA loan as soon as 12 months after you’ve filed a Chapter 13 case. Again, you’ll need to show you can make mortgage payments. Are you planning to buy a home DURING your Chapter 13 case? Be prepared to seek permission from the bankruptcy court to take on new debt.
Are you a military veteran? The Department of Veteran’s Affair (VA) offers government-backed loans that could be appealing to potential homebuyers who have filed bankruptcy. One of the most appealing factors is a down payment isn’t required.
After a Chapter 7 discharge, you’ll still need to wait two years to be eligible for VA mortgage loans. Like other lenders, you’ll also need to demonstrate a clean credit score and a minimum credit score. In some cases, special bankruptcy rules apply to military veterans and disabled veterans. Be sure to inquire about these whether you’re seeking a home loan or buying a house after bankruptcy.
Have you considered filing for bankruptcy? We understand this can be a confusing and difficult time. But help is available—Brent M. Myer practices in the areas of consumer bankruptcy and debt collection defense. With more than 15 years of consumer bankruptcy experience, he has represented debtors and creditors. He is committed to representing those who need bankruptcy relief in the Stuart, Florida area.
At the Law Office of Brent M. Myer, we believe bankruptcy is not the end. Rather, it’s an opportunity to start again.
Call us today for a free consultation.