28th Mar 2017

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Just because you filed for bankruptcy, it does not mean that you will never be able to purchase a home in the future.  Many people worry about ever being able to qualify for a house once they filed Chapter 7 or Chapter 13.  It is still quite possible to obtain the home of your dreams, even with a bankruptcy on your credit report.

 

In the past, lenders often required you to wait until a bankruptcy was removed from your credit report before they would lend any money for a mortgage.  A Chapter 7 bankruptcy stays on your credit report for 10 years while a Chapter 13 bankruptcy stays on there for 7 years.  This waiting period to obtain a mortgage loan has been greatly reduced over the past several years.  The average waiting period is 2 years, but it may be possible to obtain the loan even faster in certain circumstances.

 

There are four basic types of mortgage loans available from which to choose in buying a house.  I will discuss each type briefly here along with the bankruptcy qualification.

 

Federal Housing Authority (FHA) Loan.  This type of loan is often beneficial to home buyers with little cash up-front.  It allows first-time buyers to put down as little as 3.5 percent of the purchase price.  The credit score requirements for this loan are also less restrictive than other types of loans.  In an FHA loan, you may be able to qualify with a score of around 640, or even 580 if you can afford the higher interest rate.  The general waiting time to apply for an FHA loan after Chapter 7 is 2 years from the date of your discharge.  If you open any credit accounts since the bankruptcy, you’ll need to show that you have made your payments on-time, but you can avoid using credit altogether and still qualify.  

 

There is a possibility of lowering the waiting period from 24 months to 12 months if you can show that the need to file bankruptcy was due to no fault of your own.  It is an exception to the 2 year rule of applying for the FHA loan.  

 

In a Chapter 13 bankruptcy, you are in a 3 to 5 year payment plan through a court-appointed Chapter 13 trustee.  In order to qualify for an FHA loan in the case of a Chapter 13, you need to show that you have paid 12 months of plan payments to the trustee and you must file a motion with the court for the judge to approve the new loan, which is fairly standard and easy to do.

 

United States Department of Agriculture (USDA) Loan.  The USDA loan is made for those who purchase a home in a rural community.  It offers a low-interest rates and an option for no down payment.  You may qualify for this type of loan 3 years after a Chapter 7 discharge, but again, if you can show that the bankruptcy was through no fault of your own, you may fit into the 12 month exception to the rule.  In a Chapter 13, you can apply for the USDA loan after you have completed 12 months of payments into the plan, or possibly even sooner if you can show exceptional circumstances.

 

Veteran’s Affairs (VA) Loan.  This loan is available for veterans and offers some great benefits.  For example, you can purchase a home with no down payment, no minimum credit score and unlimited use of the loan program.  You can apply for a VA loan after 2 years of clean credit after the discharge in bankruptcy.  You do need to know that some lenders of VA loans do require a minimum credit score of 620 or higher, but not all of them do so.

 

Conventional Loan.  A conventional loan is not insured by the federal government.  This type of loan is protected by private mortgage insurance (PMI) and you will be required to pay PMI each month as part of your mortgage payment until you have at least 20 percent equity in the property.  Interest rates and credit score requirements tend to be slightly higher for a conventional loan. A conventional loan is less restrictive than other types of loans, however, in that you can have a higher debt-to-income ratio and they are more lenient with student loan debt.

 

In a Chapter 7 situation, you will need to wait 2 years after the discharge if the bankruptcy was beyond your control or 48 months if it was due to financial mismanagement.  In a Chapter 13, you’ll need to wait for 24 months after receiving your discharge or 48 months if the case was dismissed by the court.  If you filed more than 1 bankruptcy within the past 7 years, you’ll often have to wait 5 years before applying for a conventional loan.

 

If you want to discuss this topic further, please contact me at 281-847-4345 or rkemsley@kemsleylaw.com so we can discuss your individual situation and see if Chapter 7 or Chapter 13 would work for you and how it would affect the purchase of your dream home after bankruptcy.  The consultation is free and we will review your situation, determine whether you qualify to file and answer your questions.  Don’t put off your dreams and goals of becoming debt free.  Take the first step by calling me today.  I look forward to hearing from you soon.

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