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How to Buy a Home After Bankruptcy

Chances are if you’ve filed for bankruptcy, it’s because you’ve endured the crippling weight of your bills for a long time and you’re longing to find some relief. While a bankruptcy discharge can provide help by either wiping your debts clean or setting you up with an affordable payment plan, it does not come without its own disadvantages. A bankruptcy stays on your credit report for up to ten years and can affect your ability to get good interest rates on loans. While you may be hindered, you should know that owning a home is not out of the question. There are a few rules to keep in mind while figuring out how to buy a home after bankruptcy.

If you have questions about the home buying process after a bankruptcy, contact our experienced Cleveland bankruptcy lawyers at Luftman, Heck & Associates today. Call us at (216) 586-6600.

Know Your Waiting Period

If you’ve just received your bankruptcy discharge, you’ll want to wait a bit before diving into another major financial decision. In fact, some mortgage programs require you to wait. For example, Fannie Mae has a four-year waiting period for those who have filed for bankruptcy and want to apply for a mortgage. FHA and VA loans have two-year waiting periods.

Even if you’re not looking to get a mortgage from these programs, you should set a waiting period for yourself. You can use the time to build up your credit and savings. If you’ve committed to a repayment plan under Chapter 13, you may want to concentrate on repaying those debts before buying a house.

Study Mortgage Program Guidelines

There are several government-backed mortgage programs designed to help future homeowners. These programs include:

  • Federal Housing Authority (FHA) – This branch of government works with Fannie Mae and Freddie Mac to help people with low or moderate incomes find a home they can afford.
  • The Federal National Home Loan Mortgage Corporation (commonly referred to as Fannie Mae): Fannie Mae loans don’t require the standard 20 percent down, making them a more affordable option. You may also be able to finance some or all of your closing costs with your home loan, as long as you meet Fannie Mae’s stringent income guidelines.
  • The Federal Home Loan Mortgage Corporation (commonly referred to as Freddie Mac) – Freddie Mac also uses income guidelines, but this program bases its decisions more on your credit score than your income.
  • The Veterans Administration (VA) – This program is available to help veterans who have completed their service with an honorable discharge.

Rebuild Your Credit

Right after your discharge, your credit score will likely be at its lowest. The best thing you can do to make your dream of homeownership come true is to rebuild your credit. You can check Annual Credit Report’s website for an annual report, but you can also visit free sites like Credit Karma and Credit Sesame. These sites let you check your credit more often without your score taking a hit. Be sure to stick to sites that offer a free score, and use them as a general guide instead of the absolute final word.

Understand How Much You Can Afford

It’s a good idea to calculate monthly mortgage payments to see how much you can afford. Don’t forget that your payment will include principal and interest plus property taxes, HOA fees if applicable, and possibly private mortgage insurance (PMI), depending on how much money you can contribute to a down payment.

Make sure you don’t become “house poor” – many experts suggest you should spend a little under 30 percent of your monthly income on your mortgage. When you apply for a mortgage, choose a payment plan based on what your monthly income can handle, rather than taking the maximum amount of money a bank is willing to loan you.

The Effects of Foreclosure and Bankruptcy

Often, a foreclosure will lead to bankruptcy. If you fall behind on your payments and can’t afford to catch up, the bank eventually will foreclose on your property. Your home could sell at a sheriff’s sale for less than what you owe, and then you’ll be responsible for the remaining loan amount, which is known as a deficiency. Since you’re already in financial trouble, it is unlikely you can afford to pay your deficiency, so you may need to turn to bankruptcy to discharge the money still owed. People who are forced to file for bankruptcy after a foreclosure may think they can never get another mortgage, but that is not the case.

Like with any bankruptcy, you will be subjected to a waiting period. The waiting period after a foreclosure can be as long as seven years. But your time frame may be reduced if your foreclosure and bankruptcy were connected.

  • If your foreclosure happened before your bankruptcy: Your waiting period starts the day you received your discharge.
  • If your foreclosure happened after your bankruptcy: Banks are often more lenient, using the bankruptcy discharge date instead of the foreclosure date.

Call a Cleveland Bankruptcy Lawyer

If you’re thinking about ways to eliminate your debt and want to know if you’ll be able to buy a home after bankruptcy, you might want to speak to a skilled bankruptcy attorney. At Luftman, Heck & Associates, we have educated many people on the different chapters of consumer bankruptcy and certain outcomes you can expect after you file.

For a free consultation, call us today at (216) 586-6600 or email us at advice@clevelandbankruptcyattorney.com.