There are several popular misconceptions about bankruptcy, especially surrounding restrictions the debtor will face in the years after filing. For example, many people believe that someone who files for bankruptcy is no longer able to purchase a home. But this is only true for a limited time frame after declaring bankruptcy. Once the applicable waiting period expires, the debtor can qualify for a mortgage and purchase a new home. How long the waiting period is can depend on factors like the chapter of bankruptcy filed and the type of loan being sought. At this point, the debtor may be in a better position to purchase a home, no longer weighed down by the debts cleared by bankruptcy. But making sure a home purchase goes smoothly after bankruptcy can require careful planning before filing for bankruptcy. Our Phoenix bankruptcy attorneys knows the ins and outs of bankruptcy so you can focus on whatever else life is throwing your way while waiting for your debts to be cleared. We make it affordable with free consultations by phone and flexible payment plans starting at no money down. Learn more today by calling 480-263-1699.
How Long Does a Chapter 13 Bankruptcy Filing Prevent Me From Purchasing a Home?
Chapter 13 bankruptcy places debtors into a payment plan lasting three or five years, based on their household income level. With such a long commitment, this can raise concerns over how long a debtor who files for chapter 13 bankruptcy will have to wait to purchase a home. Chapter 13 bankruptcy also has a high failure rate, with the top cause for dismissal being missed plan payments. If a debtor’s case is dismissed without being reinstated and eventually discharged, a different waiting period may apply. However, if the debtor was forced into bankruptcy by extenuating circumstances, some lending agencies will reduce how long the debtor has to wait to qualify for a home loan. The accepted definition of extenuating circumstances varies from agency to agency.
Private lenders tend to have longer post-bankruptcy waiting periods to qualify for a home mortgage than government agencies like the VA, FHA, and USDA. Additionally, a chapter 13 debtor can only qualify for a conventional loan after discharge, while some chapter 13 debtors can qualify for other types of home loans while their cases are still active. The waiting period for a conventional home loan after a successfully discharged chapter 13 case is 2 years from the discharge date. If the case is dismissed instead of discharged, the waiting period increases to 4 years (from the dismissal date). The lender can reduce that back to 2 years if the filing was caused by what they determine to be extenuating circumstances.
FHA and VA loans have the same waiting period requirement of chapter 13 debtors. If approved by the trustee, a chapter 13 debtor can qualify to purchase a home 12 months into their case with proof of timely payments. The rule is the same for USDA home loans, although a debtor can qualify even earlier than the 12-month mark if their bankruptcy filing was due to extenuating circumstances. Here, the USDA defines extenuating circumstances as “including, but not limited to, whether the problems were caused by factors temporary in nature, if the circumstances leading to the derogatory credit were beyond the control of the applicant, and if the loan would significantly reduce the applicant’s housing expenses.” The debtor can begin gathering documentation in support of these factors while they prepare their bankruptcy petition, which will save them time and effort when they go to apply for home loans in the future.
How Long Does a Chapter 7 Bankruptcy Filing Prevent Me From Purchasing a Home?
Unlike chapter 13 bankruptcy, a debtor won’t qualify for a home mortgage while in an active chapter 7 bankruptcy case. The good news is that chapter 7 cases proceed much more quickly than chapter 13 cases. Most chapter 7 cases are discharged within 4 to 6 months. After this point, the debtor will have to wait 2 years to qualify for an FHA or VA loan. The waiting period for an FHA home mortgage after chapter 7 bankruptcy can be reduced to 1 year for extenuating circumstances. The waiting period for a USDA loan is 3 years, which can be reduced to 2 years for extenuating circumstances. Conventional home loans have a waiting period of 4 years, which can be reduced to 2 years for extenuating circumstances. An FHA loan is a favorable choice here, first of all, for its shorter waiting period. It also only requires a down payment of 3.5% with a credit score of 580, or a down payment of 10% with a credit score of 500. The FHA also allows debtors to qualify if they don’t incur any new credit obligations after their bankruptcy discharge. Other loans may have more favorable terms, but not everyone will meet their eligibility requirements, such as being a veteran to qualify for a VA home loan.
Re-Establishing Credit After Bankruptcy
You might not want to wait 1-2 years to open new lines of credit after bankruptcy for the purposes of qualifying for a home loan. If so, it’s important that you take action to rebuild your credit after bankruptcy discharge. It can also reduce how much money you need to put down to qualify for a home mortgage. Additionally, your credit may have changed due to filing for bankruptcy, although that change isn’t always negative. Some of the steps you can take to improve your post-bankruptcy credit score include:
- Being prudent when opening new lines of credit and making all payments on time
- Depending on the asset and equity, surrendering secured assets in bankruptcy to trade in for a new loan, which will require credit reporting
- Depositing a portion of your monthly pay into a credit builder loan account
- Ensuring that you have savings in case of an unexpected emergency
- Opening up a secured credit card to avoid the pitfalls of standard credit cards
- Opting in for credit reporting on monthly bills whenever possible
- Avoiding lines of credit with predatory interest rates, high fees, etc.
- Regularly monitoring your credit for errors, fraud, and goal progression
- Paying off credit cards monthly to keep your revolving credit balance high
Experienced Phoenix Bankruptcy Lawyers For Life’s Toughest Times
Bankruptcy is a safety net for people struggling with debt and facing collection efforts from their creditors. It can prevent worst-case scenarios from occurring, such as a home foreclosure or vehicle repossession. But it can also get in the way of major financial goals that many people have, regardless of their debt. Waiting periods for bankruptcy can often be reduced if the debtor takes steps now to prove that filing for bankruptcy was outside of their control. This is just one of the factors that should be considered for a carefully-filed bankruptcy petition. Our Phoenix bankruptcy team can help you work through the rest of them with competitive rates and flexible payment options. Get started today with your free consultation by phone at 480-263-1699 for more information.
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