Bankruptcy Home Purchasing
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Understanding Your Home Purchasing Options Before, During, & After Bankruptcy
Many borrowers incorrectly assume that filing for bankruptcy means they will lose their home. And some people hesitate to file for bankruptcy because they believe it will make them ineligible to purchase a new home in the near future — or even that it will prevent them from ever purchasing a home.
At Holston & Huntley, we’re here to dispel these assumptions. They simply aren’t true, and, if you believe them, they might stop you from taking advantage of the financial reorganization that bankruptcy provides. In most cases, filing for bankruptcy puts borrowers in a better financial position to qualify for a home purchase when they’re ready.
Purchasing a Home Before Filing Bankruptcy
The reason why bankruptcy can jeopardize real estate is because it’s a type of secured debt, meaning it’s secured by collateral, and it cannot be discharged through bankruptcy. Your lender has the contractual right to seize your home through foreclosure if you fall behind on payments. But the level of risk depends on the unique factors of the homeowner’s circumstances.
The effect that bankruptcy will have on your home generally depends on 3 factors:
- The type of bankruptcy you file
- Whether you can stay caught up on mortgage payments through the end of the bankruptcy process
- What equity you may be able to protect under state or federal exemption laws
Purchasing a Home After a Bankruptcy Filing
If you want to buy a home after bankruptcy, there are just a few things to consider. Generally, two years must pass since the discharge date of your bankruptcy filing before you can qualify for an FHA mortgage loan.
You can usually prove that this time has lapsed by providing the mortgage company with a credit report. However, if the credit report does not verify the discharge date—or if additional documentation is necessary to determine if any liabilities were discharged in the bankruptcy—you’ll need to provide the mortgage lender with the bankruptcy and discharge documents.
Chapter 7 “liquidation” bankruptcy DOES NOT disqualify you from obtaining an FHA-insured mortgage if, at the time of case number assignment, at least two years have elapsed since the date of the bankruptcy discharge. During this time, you must have re-established good credit or chosen not to incur new credit obligations.
An elapsed period of less than two years (but not less than 12 months) may be acceptable if:
- You show that the bankruptcy was caused by extenuating circumstances beyond your control; and
- You have exhibited a documented ability to manage your financial affairs in a responsible manner.
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