Filing for bankruptcy is the first step in the process. It stops creditors from pursuing collection activities, litigation, placing liens and wage garnishments. It's a fresh start when the bankruptcy is final and your debts are discharged. If you and your significant other are thinking about declaring bankruptcy and then buying a home, it's possible as soon as the day after the discharge.
The Day After
It's possible to apply for a loan the day after the bankruptcy is discharged -- not filed, but discharged. Chapter 7 bankruptcy takes a few months for the process to be completed. Chapter 13 takes 36 to 60 months to reach the discharge, but you can buy a home within that time period. You'll have to get the approval of the bankruptcy trustee to buy a home under Chapter 13. Just because you get the trustee's approval doesn't mean you'll get a home loan approved by a mortgage lender.
Two Important Factors
You'll need time to repair the damage the bankruptcy does to your credit score. You'll also need money for a down payment. Your credit score, and the amount of the down payment, affect the interest rate you'll qualify for, or whether you qualify at all. About 18 to 24 months is a reasonable amount of time to improve your credit score and save. Use the bankruptcy as a way of learning financial responsibility the hard way.
The Federal Housing Administration will insure a loan for a mortgage provider if it's been 24 months since a Chapter 7 discharge. You will also need a good credit score and to meet the other qualifications of income, assets and debt-to-income ratios for the mortgage you're seeking. If it's been 12 months since you started the Chapter 13 repayment plan, you've kept all payments current and you have the permission of the bankruptcy trustee, you may quality for an FHA loan. Disaster victims may qualify for a mortgage sooner if the disaster is the reason for the bankruptcy.
It's possible to buy a home the day after the bankruptcy is discharged, if you buy it through seller financing -- in other words, if the current owner of the home is your mortgage holder. While you won't have to go through a loan application for a bank, the owner will likely want to know that you have the wherewithal to make the payments.
Rent to Own
Rent to own is another possibility. Part of your lease payment goes toward a down payment. After the specified number of months in your leasing agreement, you'll have to buy the house with a traditional mortgage loan. Rent to own can be a life saver for young couples who didn't take their financial responsibilities seriously until they were mired in debt. The downside is if you still can't get financing, you may lose the down payment. Have the lease agreement reviewed by an attorney.
No Down Payment - No House
While a bankruptcy gives you a fresh start, it comes at a cost. You'll make a list of all your assets, bank accounts, investments, autos and personal belongings. The trustee has the responsibility of selling those assets that are not exempt and distributing the proceeds to your creditors. Different states have different levels of exemption. For example, Florida has an unlimited exemption for your home's equity, while Arizona limits the exemption to $150,000. If you were planning on using your savings as a down payment on a home, you may lose the savings as part of the bankruptcy process.
If you own a home, after the bankruptcy is discharged, you could sell the home and buy a smaller one for cash.
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