How To Buy a Home After Bankruptcy

You've hit rock bottom; bankruptcy.  You are working your way back up to financial stability, but you are unsure about how your financial situation will affect your ability to be a homeowner once again.  Although a recent bankruptcy certainly plays a factor in obtaining a mortgage and closing on a house, it can be done.

1. Chapter 7 versus Chapter 13. There are two ways of filing for bankruptcy.  Chapter 7 refers to a voluntary or involuntary situation where the debtor is allowed to liquidate his assets in an methodical way.  It is also known as a "straight bankruptcy."  In this instance, a trustee is assigned to the case. He collects all nonexempt assets, sells them, and gives the proceeds to creditors. Individuals, as well as corporations and partnerships, can declare bankruptcy.  Chapter 13 allows the debtor to keep property (if owned) and to provide creditors with periodic payments. Only individuals can apply for this type of bankruptcy.  Chapter 13 debtors do not liquidate all their assets; it is a program that reschedules an individual's debt through a payment plan.  

2. Clean up your credit. The first step toward homeownership is to clean up your credit report.  To do this, you may want to consult a specialist, as it can be a harrowing task of navigating through phone numbers and following the many loan transfers that may be on your report. Changes made to your report are not instantaneous; in fact, it usually takes a year to really see results.  If you indicate and/or show some proof to your lender that you are fixing your credit, he may take that into account when running your numbers.  The credit bureaus will usually need at least 6 months to update your report. Resources online can be useful.  Try Nolo.com for information about how to clean up your credit report.
    
3. Honesty. If you are straightforward about your financial history, lenders will know what to expect and will be more likely to try to assist you.  Your records will not lie, so it is a good idea to be forthright in all your conversations. 
4. Down payment. A large down payment will aid your cause.  The more money you can put down the better your rate will be--this goes for people without bankruptcy problems as well.  
5. Income Ratio.  Your lender will look at your income in relationship to your potential monthly payments.  If you have been in the same job--or at least the same industry--for two years the lender can do an income verification loan. In order for most lenders to feel confident about giving you a loan, they will (generally) want to see no more than 20% of your pretax income going towards your mortgage payments.  Keep in mind that the larger the percentage, the more risk you will be asking a bank to take on you. 
6. Be realistic.  Maybe you had a million-dollar home in the past and have lost it due to your bankruptcy.  Your first house after filing for bankruptcy should be a "reasonable" price, meaning, you can afford it.  You may need to go through a few humbling years, but you will make your lender's life easier if you set attainable goals.  You will make the lender's life a lot easier, and he will be more apt to get you a loan, if the finances are not a stretch for you.
7. FHA Loans. If you are not having luck securing a loan through traditional lenders, try Uncle Sam.  Federal Housing Administration Loans can be a good resource since they allow for a smaller down payment (3% or less). The FHA will insure mortgages to people who have filed Chapter 7 bankruptcy two years after the discharge if the borrower has worked to reestablish his credit rating. The FHA loan can be applied for only if the loan is equal to or less than $219,849 (except in Alaska, Hawaii, Virgin Islands, or Guam where it is $329,774 for a single family).
8. VA Loans.  The VA policy is to release any concerns if the bankruptcy was over 2 years ago. If the discharge was 1-2 years ago, the loan can be secured as long as the borrower or spouse of the borrower has been able to establish good credit,  has made all his payments, and has proven that the bankruptcy was caused by an "extenuating circumstance" (out of your control).
9. How long will it take? If you file Chapter 13, you may qualify for a loan in one year of your bankruptcy declaration. If you are a borrower in Chapter 13 debt adjustment, you can apply for a loan within the FHA system.  If you have completed one year of plan payments and a court approves your case, you may go on to the loan process. It will be a minimum of one year after discharge in Chapter 7.  If you really want to try to get a loan within one year of filing for liquidation, here's the verbiage regarding what you will need to prove:  The bankruptcy was "caused by extenuating circumstances beyond his or her control and the borrower since exhibited an ability to manage financial affairs and the borrower's current situation is such that the events leading to the bankruptcy are not likely to reoccur."