Buying a Home after Bankruptcy
Chapter 7 or Chapter 13
When an individual is forced with the difficult decision to declare bankruptcy, they have two choices: Chapter 7 which eliminates debt and Chapter 13 which is often referred to as a “wage earner plan”.
Guidelines for Chapter 7 Bankruptcy are pretty clear cut when it comes to applying for a home loan some point in the future after the bankruptcy. FHA loans require:
a) at least two years from the date of discharge,
b) the bankruptcy was due to circumstances beyond the borrower’s control
c) Credit would have to be re-established
d) All credit obligations since the discharge date have to have been paid on time (no 30 day lates reported).
Chapter 13 Bankruptcy guidelines are different than Chapter 7 because of the repayment plan. When a Chapter 13 is filed the Bankruptcy Trustee gathers all the information regarding the debts owed by the debtor and works out a payment plan that is within the person’s ability to repay. The required monthly payment is made to the trustee who forwards the money to the creditors. Depending on the debts and the debtor’s ability to repay this plan may last for several years.
Because Chapter 13 Bankruptcy indicates a willingness to accept responsibility for repayment of the debt, FHA will allow qualified borrower’s to get a new FHA loan providing:
a) They are at least half way through the plan
b) All payments have been made on time
c) They have approval from the Trustee
A previous bankruptcy is not a “deal breaker” when it comes to applying for a home loan but there is less wiggle room in certain areas of the qualifying process. Many times the decision of approval or denial on an FHA loan is based on compensating factors. FHA has published guidelines for the various aspects of borrower qualification. Compensating factors involve looking at less tangible considerations to determine loan approval.
Some of these compensating factors are:
a) Having demonstrated an ability to save for the down payment instead of a gift from a family member.
b)Purchasing a home with a payment not too much higher than current rent (avoiding payment shock) would also be a favorable consideration.
c) Job Stability- more than two years with the same employer.
There are other compensating factors that can be used depending on the borrower’s individual circumstances.
FHA loans many times are more art than science and a First Time Homebuyer Specialist can help you paint the best possible picture for the decision maker when the time is right for you to jump back into homeownership.
Whether Chapter 7 or Chapter 13 is the best option for you will be determined by your Attorney and the Bankruptcy Court. Bankruptcy is intended to be a new beginning and a home loan can be in your future if you understand how to “take care of business” during and after the Bankruptcy proceedings.
IT’S TOO IMPORTANT…DO IT RIGHT!
First Time Homebuyers Network