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Is it Possible to File for Bankruptcy and Still Purchase a Home?

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Dec,06,2017

By:Mike Cibik

Bankruptcy & Home Buying

When you file for bankruptcy, you are starting over. This is a second chance at building a better future for yourself (and family). But, a bankruptcy is a big decision to make that does have repercussions. It will stay on your credit report for ten years- this fact is what keeps people from thinking they can’t buy a home after a bankruptcy. We, at Cibik & Cataldo, want you to know that you can buy a home and you don’t have to wait until the bankruptcy is off your credit report.

You Can Buy a Home After a Bankruptcy

When you are finally able to buy a home, you must be ready for what can happen during the process. Now, you won’t have the same experience as a home buyer without a bankruptcy. But that’s okay. You just need to take a few extra steps and do a little more research.

Here are some actions you can take to ensure your home buying experience is easy:

  1. Now that you have been discharged, you will need to reorganize your finances. If you file a Chapter 7 bankruptcy, most of your debt has been wiped. You can truly see where your bills are going now, so you can create a budget. You should also work on building your credit while you are in the waiting period to buy a home. This entails checking your credit score regularly and getting a credit card. There are some credit cards that are designed for those who declare bankruptcy. Be aware that they come with high interest rates. You can shop around for a secured or unsecured credit card.
  2. Create a Savings Account. If you didn’t have one before the bankruptcy, now is the time to start. You may be required to put down a large down payment. To save for your new home, you are essentially “paying yourself first.” This means that you are putting some of your paychecks in your savings account. There are electronic savings accounts that will automatically deduct a certain amount of money each month from your checking account. You can also control how much is deducted each month. You’ll be surprised how much you can save when you don’t think about it!
  3. Create a House Plan. This means researching the type of home you want (including location and school district). Creating the plan can be a little painful because you will find out what you can and can’t afford. Ideally, you should put 28% of your monthly income towards the mortgage payment. And with the type of home you want, you should build into the budget money for maintenance.  
  4. Gather the Necessary Documents. Since you have already had to gather paperwork for the bankruptcy, you will have no problems getting the documents needed for the loan, such as the bankruptcy discharge, tax returns, and paystubs.
  5. Shop Around for Loans. Most people believe that because they filed for bankruptcy, they are not entitled to shop around for a loan. This is not true. You should shop around for a mortgage loan!

 

Types of Mortgage Loans

After declaring bankruptcy, you will have to wait a certain amount of time before you can apply for a mortgage loan. There are two popular types of loans that have their own time requirements.

Conventional Loans – Loans without government backing and sold to Fannie Mae and Freddie Mac.

With a Chapter 7 – If you declared bankruptcy due to poor money management, you will have to wait 48 months before applying for a loan. If you declared bankruptcy due to unforeseen circumstances, you will need to wait 24 months.

With a Chapter 13 – You will need to wait 24 months after the discharge. Without the discharge, you will have to wait 48 months. You will also need permission from the bankruptcy court to be able to take on another debt.

There is also fixed rate and adjustable rate. With the fixed rate, you can count on know what your mortgage payment will be each month. However, the adjustable rate, the rate will change according to the market.

Federal Housing Administration (FHA) – This type of mortgage loan is for first-buyers and those with poor credit. It’s interesting to note that FHA doesn’t make the loan; it only guarantees it because this type of loan came from a private lender.

With Chapter 7 – You will need to wait two years after the discharge date. If you can prove there were catastrophic events that lead to the bankruptcy, FHA may reduce the wait time to 12 months.

With Chapter 13 – FHA will guarantee the mortgage after 12 months – if you make your payments on time. Again, you will need permission from the bankruptcy court and show that you can handle the mortgage payment.

 

The Road to Homeownership

You can own a home after a bankruptcy. There are waiting periods, but you should use them to your advantage to save up money and to create a budget. You should also work on improving your credit history. A bankruptcy lawyer can help you not only understand the type of bankruptcy that is right for you, but also what will happen after it, especially if you want to buy a home. Contact Cibik & Cataldo today at (215) 735-1060 for a free consultation!

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