For most people, filing a bankruptcy is the most difficult financial event they will experience in their life. Often, losing a home to foreclosure is an unfortunate companion to a bankruptcy filing. To those already facing an uncertain financial future following bankruptcy, the loss of a home adds insult to injury. To the uninformed, bankruptcy and foreclosure results in the loss of hope of ever owning a home again. However, it is possible to recover from a bankruptcy filing, and to qualify for purchasing a home. But, it does take some time and effort.
Most individuals who file bankruptcy will do so under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Depending on which chapter you file under, the waiting period to qualify for a home purchase differs. With a chapter 7 bankruptcy, the waiting period begins from the date you receive your discharge. This date is typically about 4 months after the case is filed with the Bankruptcy Court. So, the sooner you file and receive a discharge, the sooner you will qualify for financing. From the date of discharge, an individual will typically have to wait four years to qualify for a conventional loan and two years for either FHA or VA financing. The FHA’s short term “Back to Work” program offers qualified buyers the potential of qualifying even faster. This program requires, among other things, that a homebuyer demonstrate that the loss of the previous home was due to circumstances beyond their control, (such as a loss of a job), and a minimum credit score of 640 or submission to a HUD-approved counseling agency related to homeownership and residential mortgage loans.
The timeline for chapter 13 is different. Similar to Chapter 7, the waiting period begins to run from the date of discharge. Unlike Chapter 7 however, a Chapter 13 discharge can typically take three to five years from the date the case is filed. The good news is that a person can qualify for a conventional loan two years after receiving a discharge and even faster for an FHA or VA loan.
The above timelines assume that the debtor who files bankruptcy has not suffered a foreclosure either before or during the bankruptcy process. For individuals who manage to avoid bankruptcy but lose their home to foreclosure, they may be facing a longer wait. Generally, to obtain a conventional loan the waiting period after a foreclosure is seven years, and four years following a deed in lieu (voluntary surrender of the home), or a short sale (a sale of the property for less than is owed on the mortgage). An individual can pursue FHA financing two years after foreclosure while VA lenders can approve a loan two years after foreclosure. Depending on the lender, veterans and service members may not have to wait at all following a short sale.
For those who suffer both a bankruptcy and a foreclosure, the timing generally is the same for those who only suffer a bankruptcy. However, qualifying for a new mortgage depends on your credit score and filing a bankruptcy will cause a major hit to your score. It will be important to those whose goal is to purchase a home to engage in a concerted effort re-build their credit score. This is generally accomplished by obtaining and using credit wisely over a demonstrated period of time.
While foreclosure and bankruptcy create limitations on qualifying for a new home loan, those limits are not indefinite and for the motivated and educated consumer can definitely be overcome.
Call your Tempe Bankruptcy Lawyer today!