Bankruptcy clients are always concerned about how a bankruptcy filing affects their credit history and ability to obtain new credit. One of the most frequest issues is whether bankruptcy will disqualify the debtor when trying to buy a home in the future. This question is particularly pertinent for clients considering whether to try to remain in a current home where the payments have become very burdensome. Soemtimes the best long-term strategy is to walk away and start over as part of the debtor's fresh start.
You may qualify to purchase a home as early as one year after filing Chapter 13 (while the plan is still being funded), or one year after discharge in Chapter 7, depending upon the circumstances. The more customary period is two years. Whether you can qualify for FHA or VA loan guarantees may be a determining factor in your ability to obtain a home loan.
FHA will insure mortgages to individuals who have filed Chapter 7 liquidation bankruptcy two years after the discharge if "the borrower has re-established good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs."
To obtain a loan within one year after the discharge, the borrower must show that "the bankruptcy was caused by extenuating circumstances beyond his or her control and has 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 recur."
FHA will consider approving a borrower who is still paying on a Chapter 13 Bankruptcy if those payments have been satisfactorily made and verified for a period of one year. The Chapter 13 trustee’s written approval is required in order to proceed with the loan. You will have to give a full explanation of the bankruptcy with the loan application and must also have re-established good credit, qualify financially and have good job stability.
FHA insured mortgages are generally not available to borrowers whose property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years. If the foreclosure was the result of extenuating circumstances, however, an exception may be granted if you have since established good credit. This does not include the inability to sell a home when transferring from one area to another.
VA has similar regulations:
- If the bankruptcy was discharged more than 2 years ago, it may be disregarded
If the bankruptcy was discharged within the last 1 to 2 years, it is probably not possible to determine that you and/or your spouse are a satisfactory credit risk unless both of the following requirements are met:
- you and/or your spouse have reestablished satisfactory credit, and
- the bankruptcy was caused by circumstances beyond your and/or your spouses control (such as unemployment, medical bills, etc.)
If the bankruptcy was discharged within the past 12 months, it will not generally be possible to determine that you and/or your spouse are satisfactory credit risks.
VA regulations allow granting of the loan guarantee to a person in a Chapter 13 when the plan payments are finished satisfactorily, or after 12 months payments and the trustee or the court approves of the new credit.
If you obtain home loan financing with a loan guarantee, the loan rate should be based on the guarantee status of the loan. As a result, the interest rate should not be significantly affected by the bankruptcy.