Just because you’ve filed for bankruptcy doesn’t mean your chances of owning a house are forever in doubt. If you are otherwise able to become credit-worthy in the future, filing for chapter 7, 11, or 13 will not create a permanent roadblock for you in your home-buying ventures. However, there are some stipulations you need to know about.
Depending on which chapter of bankruptcy you filed under, 7 or 13 (which are the most consumer-centric forms of bankruptcy), determines when you’ll be eligible to purchase a home. However, there are provisions for people who have filed for chapter 11 that are worth noting if you haven’t yet declared bankruptcy. Chapter 11 allows individuals and businesses rearrange their finances and repay portions of their debt. Most plans for chapter 11 last three to five years, but it can be used to stop a foreclosure of your current home and catch up on late mortgage payments, rewrite the terms of a mortgage, and pay down tax liability without interest.
However, those who have filed for chapter 7 or 13 have already relinquished ownership of their home and are now looking for options for the future. Let’s begin with those who have filed for chapter 7.
Individuals who filed chapter 7 liquidation bankruptcy will generally be eligible for a conventional loan four years after discharge, and eligible for FHA insured mortgages two years after the discharge, but only if the borrower has established good credit and has proven they can manage their financial affairs. FHA is not a bank; rather it’s a government agency that insures loans from lenders who are FHA approved.
You not only have to abide by the rules of the FHA, but those of the lending institution as well. For example, credit scores weigh heavily in whether or not you’ll be eligible for financing, and most FHA loans for consumers with credit scores of 640 and above are approved. However, if you’ve filed for chapter 7, it’s been four years since it was discharged, and you’ve got a 20 percent down payment, you may be approved with a credit score as low as 540.
It’s possible to become eligible for a conventional loan after only two years of a chapter 13 discharge, the most convenient and lenient of which are FHA and VA loans. However, if you can prove that you’ve had 12 consecutive months of making all your payments on time and you get permission from the courts, you could be eligible in only one year from the discharge.
Prospective homebuyers in chapter 13 are repaying a portion of their debts on a monthly basis and do not have the freedom of following through with a financial transaction, such as getting financing for home loan. Filing chapter 13 means it will be on your credit score for seven years, and if you want to buy a home through financing, you’ll need to get the case trustee’s consent. Keep in mind that if you do get consent and a lender gives you a loan, it will likely be at a much higher interest rate due to the risks involved.
Get Expert Advice
Szabo Law Group has a great deal of experience in bankruptcy cases. If buying a home is in your future plans, connect with us and we’ll go over your case and tell you what options are available to you.