Impact: Buying a House Right after Bankruptcy

The only constraint to a person’s ability to buy a house right after emerging from a bankruptcy by discharge is finding someone who will give that person a loan to buy that house.  Knowing that mortgage providers use a formula involving income, liabilities, credit rating(s), family size, and some other criteria, the emerging debtor may or may not know the financial picture that the debtor now has, may or may not realize what his or her financial picture means.  A typical scenario for a person who becomes a bankruptcy debtor is that before filing for bankruptcy, the person filing has likely been going through some rather difficult financial and credit situations.  Depending on the number of creditors involved and the length of time the difficulties have been going on, the person who will file has likely had his or her credit rating in a steady decline.  Creditors typically file their information to the credit bureaus every month to three months.  While creditors must halt collection action while the debtor is in bankruptcy, the creditors can and likely will continue to report the account as being delinquent, continuing to negatively impact the debtor’s credit score.  Consider the fact that a Chapter 13 bankruptcy will continue for 36 to 60 months before discharge, but you also have that time to prepare for coming out of bankruptcy.  While many people have stated their experience of losing 100 to 200 points from their credit score following bankruptcy discharge, some have stated that they experienced 300 to 600 lost points.  It is hard to express anything reasonable in facing a 600 point loss on a credit score.  Brutal does not seem adequate in any way to describe that outcome.  Those experienced with reclaiming credit and obtaining credit after a discharge related that improvements can begin to be felt within six months.  Most general lenders want to see two years of problem free on-time payments before considering making a loan.  Those lenders who are willing to provide loans sooner are very likely to demand higher interest rates and adjustable rates.  While a higher rate is possibly doable, an adjustable rate can quickly drive the person back into a financial struggle.  Most recommended staying away from the adjustables.

One specific lender that a person fresh out of bankruptcy should consult with is the Federal Housing Administration (FHA).  The interesting and rather good news about the FHA is that they do not use FICO® credit scoring to make a loan decision.  If this is actually accurate, then the constraining criteria end up being rather simple.  Except for the necessary waiting periods stated, almost anyone in need should be capable of applying for an FHA mortgage. To qualify for an FHA loan you need:

— to wait 24 months after your Chapter 7 discharge

Or have both
— a discharged Chapter 13

and
–12 months of on-time Chapter 13 payments if you’re still paying your trustee

as well as trustee approval to obtain the loan while under bankruptcy control.

Also, most FHA loans have upper limits for different property areas. One needs to check and know what the loan limit is and that the mortgage being sought does not exceed the loan limit for that area.

Once one knows what the area loan limit is one only has to contact an FHA mortgage lender and inquire about applying and being pre-approved.

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