Perhaps you're a few years into a Chapter 13 payment plan, or maybe you are rebuilding your finances after receiving a Chapter 7 discharge of your debts. One common question many individuals have after filing for bankruptcy, regardless of the type, is purchasing a home after filing for bankruptcy. Keep reading for important information about purchasing a home after bankruptcy.
Purchasing a Home After Chapter 7 Bankruptcy
A Chapter 7 bankruptcy liquidates your nonexempt assets and uses the proceeds to repay a portion of your debt. The bankruptcy trustee then forgives the remaining eligible debt, providing you with a clean slate.
Since you're starting a new chapter in your life debt-free, you may want to purchase a home or swap your existing home for one that better meets your needs. However, you should follow a few guidelines when purchasing a home after Chapter 7 bankruptcy. In most cases, you'll need to wait two to three years after the date of your bankruptcy discharge (not your filing date) to qualify for a mortgage.
Each type of mortgage has its own credit and lending requirements that you'll have to meet. If your bankruptcy filing was due to no fault of your own, the lender may approve your application a mere 12 months after your discharge date.
However, the fault of bankruptcy is arduous to prove, as many individuals make some mistakes that contribute to their financial distress. One possible example of a faultless bankruptcy is excessive medical bills for necessary procedures that your health insurance refused to cover. Be prepared to prove that your actions before your bankruptcy were financially responsible.
A mortgage insured by the Federal Housing Administration (FHA), better known as an FHA loan, is a popular choice for individuals after bankruptcy due to the low down payment requirement and less stringent credit requirements. Most borrowers will qualify for an FHA loan two years after their bankruptcy discharge.
Another top option for individuals who live in rural areas is a United States Department of Agriculture (USDA) mortgage. These loans offer the option to make no down payment while still providing an affordable interest rate. Expect to wait three years after your discharge date to qualify for a USDA loan.
Conventional loans have the most stringent criteria. Most lenders have a four-year waiting period after your debt discharge. If the bankruptcy was out of your control, the lender may shorten the waiting period to two years.
Shopping for a Home During a Chapter 13 Bankruptcy
A Chapter 13 bankruptcy is much different than a Chapter 7 bankruptcy. You get to keep your assets, but you must pay back some of your debts for three to five years after your filing debt. Once you complete your plan, the bankruptcy trustee dismisses the remaining qualifying debt.
It's tricky to purchase a new home while during a Chapter 13 plan because all your disposable income must go towards repaying your creditors. You also need to petition the bankruptcy trustee to take on new debt; otherwise, the trustee can throw out your case because you didn't adhere to the rules. Many lenders and home sellers are wary of working with someone in the middle of a Chapter 13 plan.
If you can prove to the trustee that you need to purchase a new home, it is possible to do so once you make 12 consecutive Chapter 13 plan payments on time. Some possible reasons the trustee might approve a new mortgage include:
- Relocation to a different area
- Desire to downsize to a more affordable residence
- Growth in your household's size
If you have an existing home that you'll need to sell, you must acquire permission before doing so. The bankruptcy trustee may require you to use some of the proceeds from the sale of your home to repay your credits, depending on the asset exemption laws that apply to your state.
Feel like your debt is taking over your life? Contact W. Mack Rice, P.A., Attorney at Law, for a free consultation.