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Realty Executives International - Jan 3, 2022
Going bankrupt is one of the most distressing things that can happen to a person. Some of the common causes of bankruptcy include burdening medical expenses, job losses, excessive spending on credit, divorce or separation, and heavy expenses due to unforeseen events.
All of these can be quite taxing on your mental and physical health, as well as your financial outlook. On top of that, you may also be worried that you won’t be able to buy a home for yourself and your family anymore, which is an added burden. This article covers everything you need to know about buying a home after filing for bankruptcy.
Let us put your mind at ease by telling you that it isn’t impossible for you to buy a home after bankruptcy. When you file for bankruptcy, there is no restriction or law that prohibits you from buying a house, but it will make the process much more difficult. Not only will you have to follow certain steps, but you will also have to wait for some time before you can apply for a loan or mortgage.
Once you are cleared from bankruptcy, you will be able to qualify for a home loan and apply for it. However, it won’t be as easy as applying for a loan if you hadn’t filed for bankruptcy.
When you are planning to buy a home after the bankruptcy status has been cleared, there are some issues that you will need to address before you can go about it. Let’s have a look at the post-bankruptcy issues that you will have to go through.
First and foremost, there is a certain mandated waiting period that you need to complete after you have been discharged from bankruptcy before you can apply for a loan. The waiting period can differ according to several factors, such as the lenders and creditors you have approached, the laws of the state, etc.
Bankruptcy can damage your credit score and credit report significantly, and this hampers your ability to secure a loan to buy a home. When you file for bankruptcy, it may cause your very good credit score to drop by as much as 200 points. Moreover, if you have a fairly good credit score, it may even drop by 150-160 points. Therefore, you will have to repair your credit score before you can even qualify for a mortgage.
Another issue that you need to address is the requirement of finding a mortgage that is fair and represents your circumstances, financial condition, and requirements. There are several companies and financial institutions that provide you with mortgage loans with different types of interest rates and conditions, and you will have to review all of them before you make a decision.
Lastly, you will also have to recognize the filing rules that apply to your situation, and these depend on where you live, the amount of loan that you need, your credit score, and several other factors.
The waiting period that you must spend before applying for a loan depends on several factors, including the type of loan you want and the type of bankruptcy that you have filed for. Some of the types include Chapter 7 and Chapter 13 bankruptcy. Let’s have a look at both scenarios in greater detail.
Chapter 7 bankruptcy, or liquidation bankruptcy, is the most common type of bankruptcy, and it causes most of your debts to be wiped away. However, it has a more severe impact on your credit report, and it reflects in the report for up to 10 years.
Once your bankruptcy case is discharged, the lenders have a mandatory waiting period between two to four years, after which you can apply for a mortgage. More specifically, VA or FHA mortgage programs require two years, whereas a USDA loan requires a three-year waiting period. Any conventional loan can be applied for after a waiting period of four years.
This type of bankruptcy filing is also known as reorganization bankruptcy, and it involves periodic payments to clear the debt. Since you are paying the debt eventually, this doesn’t harm your credit score as much as Chapter 7 bankruptcy does. Also, the waiting period to apply for loans is also lower in this type of bankruptcy.
If the bankruptcy court rules against you, you will have to wait four years from the date at which the judgment was announced. On the other hand, if your case is discharged, you must wait four years from the filing date and two years from the discharge date before you can apply for a conventional loan. Otherwise, you can apply for a USDA loan within one year, and the FHA and VA loan programs have no waiting period.
In a nutshell, you can buy a home after filing for bankruptcy, and you can do it through a home loan or mortgage. However, there might be several hurdles along the way, especially regarding the bad credit score and the long waiting period. Therefore, it is best if you consult with a professional who can provide you with sound bankruptcy advice before you make this decision.
About the Author: Lyle Solomon has considerable litigation experience as well as substantial hands-on knowledge and expertise in legal analysis and writing. Since 2003, he has been a member of the State Bar of California. In 1998, he graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, and now serves as a principal attorney for the Oak View Law Group in California. He has contributed to publications such as Entrepreneur, All Business, US Chamber, Finance Magnates, Next Avenue, and many more.