Purchasing a Home After Chapter 7 Bankruptcy

Beautiful house in the southern style

Can I purchase a home after filing for bankruptcy?

This is a very common question and the answer is a good one – of course you can purchase a home after bankruptcy!  You can qualify for a loan as little as one year following a discharged bankruptcy, although most people will qualify after two years.

If you’ve just recently had your bankruptcy discharged, and plan to buy a home in the future, the best thing you can do is start rebuilding your credit as soon as possible.  After clearing all of that debt and getting a clean slate, the last thing you may want to do is open a credit card account, but opening new accounts and keeping them in good standing is necessary to rebuild your credit and show that you’re becoming responsible with your finances.

You only need to use the credit card minimally.  You do not need to charge up a balance or carry a balance.  You just need to use it enough to make sure the company is reporting your payments as current, so use it once or twice to pay your cable bill or phone bill online, and then immediately make a payment from your checking account to the credit card for the same amount.  You don’t need to wait for a statement to make a payment.  You can do this every month, or every other month.

The first card you’re probably going to get approved for after bankruptcy is a secured credit card with a small credit limit.  You will send in a deposit after being approved, and then you will receive a card with a credit line equal to your deposit.  It’s almost like a pre-paid account, but that deposit does not get applied to your payments.  You still need to make your payments on time, with additional funds.

You need to apply for one or two of these cards right away to start establishing a positive payment history, giving your credit score time to heal.  The longer the positive history, the better your score can rebound.  When applying for a mortgage, underwriters (and the automated underwriting system) will want to see that you’ve been able to handle your bills responsibly for a certain amount of time.  One or two months of on-time payments is not enough to prove that you’re not going to go down the same road.

Ok, so we’ve reviewed how to rebuild credit, but how can I qualify for a loan to purchase a home after bankruptcy?

FHA (Federal Housing Administration) launched a program August 2013 called the “Back-to-Work Initiative.”  This program allows people who suffered a financial hardship with subsequent temporary loss or reduction of income to qualify for a loan purchase a home just one year after bankruptcy, short sale, foreclosure, or deed-in-lieu of foreclosure.  To qualify for a loan insured by FHA, you must meet all four of the following requirements:

Extenuating Circumstances to Buy a Home 1 Year after  Chapter 7 Bankruptcy Discharge

*Extenuating circumstances must have been beyond your control, such as a serious illness or death of a wage earner in your immediate household, and you must have re-established good credit since. Divorce is not considered an extenuating circumstance.

In order to qualify for the extenuating circumstance exception and purchase 1 year after Chapter 7 bankruptcy, four key components must be documented:

  1.  Satisfactory Credit History – Good credit history must have been demonstrated prior to your hardship, or “economic event.”  This means you need to have a fairly clean credit history (no collections or late payments, judgments, etc.) before getting sick, losing your job, etc.
  2.  Economic Event  You must be able to document that the credit impairments were due to the economic event, or hardship.  An economic event is defined as loss of employment or loss of income by at least 20% for a minimum of 6 months.

Loss of Employment verified with: Written termination notice, or other publically available documentation of business closure, and documentation of receipt of unemployment income.

Loss of Income verified with: Written Verification Of Employment evidencing prior income, or signed tax returns,paystubs, or W-2s evidencing prior income.

  1.  Recovery from economic event – You must demonstrate full recovery from your hardship for a minimum of 12 months demonstrated by Satisfactory Payment history since event.
  2.  Housing Counseling – You must have completed HUD-approved housing counseling at least 30 day prior to application date, but no more than 6 months prior to application date.

I don’t meet these four requirements, can I still qualify to purchase a home after bankruptcy?

If you don’t meet these four requirements, your waiting period will be one additional year, so you will qualify two years after your Chapter 7 bankruptcy discharge.  The good news is, you won’t have to provide as much documentation after two years, and you won’t have to go through housing counseling.  It will be a standard loan application.

Two years following a Chapter 7 bankruptcy, Equity Builders Home Financing and Real Estate offers loans to people with a minimum credit score of 600 and a down payment equal to 3.5% of the purchase price of the home.  You may also need additional funds for closing costs – how much will depend on your contract with your seller and whether or not you’re choosing a higher interest rate in exchange for a lender credit toward closing costs.

There are just a few additional requirements if your credit score falls between 600-619:

  • Three months verified reserves. Three months reserves means having savings equal to 3 months of your mortgage payment still in your bank account after buying the home.  Reserves can not be from a gift.
  • Gift funds for a down payment are allowed if by a documented immediate family member; (mother, father, sister, brother, spouse, grandparents) No cousins, fiancées, etc.

 

It has been more than 2 years since my bankruptcy – are there any better options for me?

The one downside to FHA loans is the upfront mortgage insurance premium, and the monthly mortgage insurance, even if you have a large down payment.  Also, if you’re looking at condos, many complexes are not FHA approved.

If you’re putting more than 20% down, and it’s been over 4 years since the discharge of your bankruptcy, you are eligible for a conventional loan without mortgage insurance.  Even if you don’t have 20% down, conventional loans with mortgage insurance (that’s cheaper than FHA premiums) are available to you.  Here are the conventional loan waiting periods:

  • Chapter 7 or 11: 48 months since discharge/dismissal.
  • Chapter 13: 24 months from discharge date, or 48 months from dismissal date
  • Waiting period increases to 60 months, or 5 years, for borrowers with multiple bankruptcies, if there was more than one filing in the past 7 years

 

Just as with FHA loans, your credit history will need to be re-established since the bankruptcy in order to qualify for a conventional loan.

A re-established credit history consists of:

  • Minimum 4 years re-established or reaffirmed credit
  • No past due or late payments since the discharge on the mortgage/rental history
  • No more than (2) 30-day late payments on installment or revolving accounts in the previous 24 months.
  • No 60 day late payments since the discharge
  • No new public record filings (tax liens, wage garnishments, past due child support, etc), collections or charge-offs
  • The number of open accounts required are determined by automated underwriting

 

*************************************************************************************

If you feel you meet the requirements and would like to apply for a preapproval or refinance, please use the apply now feature and fill out your information.  There is a credit report charge of $19.50 for one applicant, and $21.50 for a married couple applying together.  Please apply separately for any other joint borrowers.  Upon completion of your application, you will receive a summary of your credit scores for your personal review.

To evaluate your application we will also need:

  • Last two years tax returns, including all schedules, W2’s and 1099’s
  • Last two months bank statements (all pages, even if blank)
  • Last 30 days paystubs or year-to-date profit and loss statement (if self-employed)
  • Full Bankruptcy Paperwork

 

Please email your remaining documents in PDF format to Stephanie.irto@gmail.com.