Buy a Home After Filing Bankruptcy

Filing for bankruptcy is not an easy decision. However, mounting debt can be both crippling and so stressful that you feel like you will never recover. But, you will. With the clean slate of bankruptcy, you can rebuild your credit and be ready to purchase a home in a shorter time than you might think.

Steps

Creating Your Home Buying Plan After a Bankruptcy

  1. Understand the type of bankruptcy you filed. While there are actually six different types of bankruptcy cases, chances are you filed either under chapter 7 of the federal code or chapter 13.[1] How you filed your case may affect your ability to buy a house after bankruptcy.
    • In a chapter 7 bankruptcy, the trustee directed your assets to be liquidated and distributed to your creditors in exchange for a complete discharge of all of your debts. This is the "clean slate" form of bankruptcy.[2]
    • If you filed under chapter 13, the court consolidated your debts and set up a payment plan. After regular payments for three to five years, the balance of your debts was discharged. The courts often refer to this as a "wage-earner's plan."[3]
    • Both types of bankruptcy can stay on your credit report for up to ten years. However, the credit reporting agencies will often remove successfully discharged chapter 13 bankruptcies as soon as seven years from the filing date.[4]
  2. Check your credit score. This may seem fruitless, but you need to know where you are starting from. You are entitled to one free credit report every year at https://www.annualcreditreport.com. This is the only credit reporting service that is authorized by federal law.[5]
    • You can also periodically monitor your credit score at no charge at sites like Credit Karma or through your credit card companies.[5] As you pay your bills and start to rebuild your credit, you can watch your score increase.
    • Be very wary of any site offering free credit scores and credit reports that requires you to enter a credit card number. You may find yourself being charged for monthly credit monitoring services of dubious value.
  3. Create a down payment savings plan. Many financial professionals recommend saving 20 percent of the projected purchase price for a down payment.[6] On a $100,000 house, that is $20,000. That is the best case scenario assuming a conventional mortgage. There are some other mortgage options, but you should start a regular savings plan, aiming to put money away every paycheck.
    • If you can qualify for a government regulated FHA loan, your down payment may be reduced as low as 3 percent. On a $100,000 house, this reduces the initial investment to $3,000.
    • Honorable discharged veterans may qualify for a Get a VA Home Loan. However, you will still need savings for closing costs and moving.[7]
  4. Calculate how much you can afford to pay for a house. Your mortgage is not your only expense. Since your house will be under a loan, you will have to pay homeowner's insurance and no one can avoid property taxes. In general, you should budget no more than 28 percent of your gross monthly income for housing expenses.[8]
  5. Live well within your income and establish credit. After your bankruptcy is settled, the fastest way to see your credit score rise is to pay all your monthly bills on time and to cautiously and gradually take on debt in the form of credit cards, auto loans, or small bank loans.
    • Avoid "credit-rebuilder" credit cards with high hidden fees to set-up the account, monthly account maintenance fees, or annual fees. Shop around for no-fee credit card.[9]
    • To help your credit score increase faster, keep your credit card balances below 30 percent of your total available credit limit.[10]

Applying for a Mortgage After Filing Bankruptcy

  1. Review the requirements of government-affiliated mortgage programs. Along with the Federal Housing Authority, the US government works in tandem with two quasi-government enterprises to help ensure availability of mortgages for low and moderate income Americans.[11]
    • The Federal National Home Loan Mortgage Corporation, commonly known as Fannie Mae, offers not only low down payments, but also lets you finance some or all of your closing costs in the loan.[12] There are strict income guidelines and documentation that you will have to produce to qualify.[13][14]
    • Freddie Mac, the common name for the Federal Home Loan Mortgage Corporation,[15] also has income guidelines and is more dependent on your credit score.[16]
    • The Federal Housing Authority, or FHA, is a government-guaranteed loan available to those who meet income guidelines that are less strict than Fannie Me and Freddie Mac. Down payments can be as low as 3.5 percent.[17][18]
    • Veterans Administration loans may be available to those who completed their enlistment with an honorable discharge.[19][20]
  2. Consider non-governmental mortgage options. There are additional options available for homebuyers with poor credit outside of government loans. These include:
    • The Neighborhood Assistance Corporation of America (NACA) is a non-profit group that assists people with damaged credit obtain affordable mortgages with little or no down payment.[21] A NACA mortgage is not dependent on your credit score, but involves an intense 2+ year financial counseling and savings plan that you must complete before NACA will approve your application.
    • Conventional loans are also an option after a bankruptcy. Contact your local bank or credit union to discuss mortgages that may be suitable for your income and credit profile.
    • You can also seek seller-financed homes. This type of agreement involves your directly paying the seller of home over time, rather than working through a bank. However, seller financing contracts must still be legal documents written by a real estate lawyer in order to protect the interests of both you and the seller.
  3. Understand the bankruptcy waiting periods. The FHA and VA have the shortest waiting periods to apply for a mortgage after a bankruptcy. In general, if the bankruptcy has been completed to the satisfaction of the court, your waiting period is two years from the final discharge of your bankruptcy. The lender may make exceptions for otherwise well-qualified borrowers who are working a chapter 13 bankruptcy and have made 12 months of on-time payments.[22]
    • Fannie Mae loans have a two to four-year waiting period from the discharge date depending on the circumstances of the bankruptcy.[23]
    • There is no automatic waiting period for a mortgage through NACA or a conventional mortgage. However, the NACA financial counseling and savings plan may take at least two years to complete. Conventional lenders will likely have their own requirements as well, but also have the flexibility to consider your overall circumstances and write mortgages at any time after your bankruptcy filing.
    • The waiting period is a good time to build up your savings and credit score.
  4. Beware of mortgage scams. Sitting out the waiting period after the discharge or your bankruptcy and the slow process of rebuilding your credit can be frustrating. However, the phrase "Your Bad Credit Doesn't Matter," is a warning sign to hang up the phone, throw away the junk mail, or delete the email. Be aware of the common signs that a mortgage may be a scam looking to prey on your desire to buy a house after your bankruptcy.
    • Mortgages that claim your income or credit doesn't matter. If a lender is willing to make a loan that will drive your mortgage payment plus insurance and taxes above 28 percent of your gross income, this is a company that is setting you up to fail.
    • Excessive loan processing costs and prepayment penalties. Your closing costs should not exceed 5 percent of the loan and prepayment penalties are illegal for owner-occupied homes.
    • Refusal to detail all costs, fees, and commissions associated with the loan.
    • If you suspect you have been approached by a mortgage scammer, report it to http://www.stopfraud.gov/report.html.[24]

Sources and Citations

  1. ↑ http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/process-bankruptcy-basics
  2. ↑ http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-7-bankruptcy-basics
  3. ↑ http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
  4. ↑ https://www.credit.com/debt/filing-for-bankruptcy-difference-between-chapters-7-11-13/
  5. ↑ 5.0 5.1 https://www.annualcreditreport.com/index.action
  6. ↑ http://blog.credit.com/2015/05/5-steps-to-buying-a-home-after-bankruptcy-115998/
  7. ↑ http://www.freddiemac.com/singlefamily/factsheets/sell/pdf/home_possible_97_572.pdf
  8. ↑ http://www.bankrate.com/calculators/mortgages/new-house-calculator.aspx
  9. ↑ http://www.nerdwallet.com/blog/top-credit-cards/best-no-annual-fee-credit-cards/
  10. ↑ https://www.nerdwallet.com/blog/uncategorized/credit-utilization-improving-winning/
  11. ↑ http://www.nationalreview.com/corner/359689/first-fannie-and-freddie-now-fha-patrick-brennan
  12. ↑ http://www.fanniemae.com/portal/about-us/company-overview/about-fm.html
  13. ↑ https://www.fanniemae.com/content/guide_form/1084.pdf
  14. ↑ https://www.fanniemae.com/content/guide/selling/b3/3.1/01.html
  15. ↑ http://www.freddiemac.com/
  16. ↑ http://www.freddiemac.com/learn/pdfs/uw/docmatrix.pdf
  17. ↑ http://portal.hud.gov/hudportal/HUD?src=/buying/loans
  18. ↑ http://www.bankrate.com/finance/mortgages/7-crucial-facts-about-fha-loans-1.aspx
  19. ↑ http://www.bankrate.com/finance/mortgages/getting-va-loan.aspx
  20. ↑ http://www.benefits.va.gov/homeloans/purchaseco_loan_fee.asp
  21. ↑ https://www.nacalynx.com/naca/Purchase/purchase.aspx
  22. ↑ https://www.veteransunited.com/valoans/getting-a-va-loan-after-a-bankruptcy/
  23. ↑ https://www.fanniemae.com/content/guide/selling/b3/5.3/07.html
  24. ↑ http://www.stopfraud.gov/report.html#mortgage

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