You've hit rock bottom; personal bankruptcy. This may leave you questioning how to buy a home or if it can even be done. Although a recent Chapter 7 or 13 bankruptcy certainly plays a factor in getting a mortgage loan and closing on a house, it is possible to secure a home loan after bankruptcy.
- Chapter 7 versus Chapter 13 Bankruptcy Laws. There are two bankruptcy alternatives. Chapter 7 refers to a voluntary or involuntary situation where the laws allow the debtor to liquidate his assets in a 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.
Many people wonder what Chapter 13 bankruptcy is compared to Chapter 7. The difference is basically that Chapter 13 laws allow the debtor to keep property (if owned) and to provide creditors with periodic payments. Only individuals can apply for it. In this process, debtors do not liquidate all their assets; it is a program that reschedules an individual's debt through a plan for payment.
- Clean up your credit. The first step toward being a homeowner is to clean up your bad credit on 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 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 rules and information about how to clean up your credit report. All of this needs to be done prior to buying a house or checking on available home loans.
- 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.
- 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 Chapter 13 to Chapter 7 bankruptcy problems as well.
- 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 they 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 toward your mortgage payments. Keep in mind that the larger the percentage, the more risk you will be asking a bank to take on you.
- Be realistic. Maybe you had a million-dollar home in the past and have lost it due to a Chapter 7 or Chapter 13 bankruptcy law. Buying a home after filing for bankruptcy should be done at a "reasonable" price; meaning you can afford it. Remember that you have hit a huge financial roadblock and therefore you may need to go through a few humbling years. The reality is that you likely will not have any new home construction loans, at least not for many years. If you are determined to buy an existing house, you will make your lender's life easier if you set attainable goals, and he will be more apt to get you a loan if the finances are not a stretch for you.
- 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). They 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 loan can be applied for only if it 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).
- VA Loans. The VA loan policy has different Chapter 7 and Chapter 13 information. Their policy is to release any concerns if the bankruptcy was over 2 years ago. If the discharge was 1-2 years ago, the VA 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).
- How long will it take? The Chapter 13 rules state you may qualify for a loan one year after your declaration. If you are a borrower in this 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 what the verbiage is regarding what you will need to prove: The bankruptcy was "caused by extenuating circumstances beyond his or her control and the borrower has since exhibited an ability to manage financial affairs, and the current situation is such that the events leading to the bankruptcy are not likely to reoccur."
Hopefully, this bankruptcy advice has been helpful to you. If you still have concerns, be sure to contact the VA or FHA and they will be happy to answer any further questions you may have. Best wishes in your quest to reposition yourself financially and become a homeowner.