Bankruptcy and Real Estate: How Long Do You Have to Wait to Buy a House?

One of the things that people worry about the most when considering filing for bankruptcy is whether they will ever be able to buy a home or not. They think that bankruptcy will devastate their credit, and that it will be 10 years before they can buy a house. Fortunately, that’s not the reality. You will be able to buy a home much more quickly after filing for bankruptcy so long as you take good care of your finances and do the right things to rebuild your credit.

Here’s what you need to know about buying real estate after filing for bankruptcy:

Chapter 7 Bankruptcy

Chapter 7 bankruptcy typically discharges all your unsecured debts. It’s the “clean slate” option that so many people think of when they think of bankruptcy. But not just anyone can qualify for Chapter 7 bankruptcy. You have to meet the “means test,” which looks at your income and your living expenses, among other things.

If you successfully file for Chapter 7 bankruptcy, you should be able to qualify for a traditional mortgage loan in just two years. The FHA has guidelines that say it will insure mortgages to those who have filed for Chapter 7 bankruptcy after two years, so long as they have taken steps to maintain good credit and financial health.

Traditional loans are backed by the FHA, and these loans have the best interest rates. You may be able to get approved for a subprime loan earlier after filing for bankruptcy, but you will end up paying a lot in interest, and they won’t be good for your finances in the long term. It’s best to wait until you can qualify for a prime loan.

Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy filing, you work with the trustee to create a repayment plan that pays off all or most of your debts within three to five years. You get one monthly payment for everything, and you pay off your debts faster. Whatever is not paid off at the end of the term may be discharged.

If you file for Chapter 13 bankruptcy, you can qualify for a traditional, FHA-backed mortgage after just one year. Again, you will need to have maintained a good financial record and taken steps to rebuild your credit. But if the bank thinks you are on the straight-and-narrow, it will approve your application regardless of your bankruptcy filing after just one year.

Other Requirements

To improve your chances of getting approved for a mortgage after a bankruptcy filing, you will need to live within your means and pay all your bills on time. Even one late payment within that first year or two could be taken as a sign that you are still struggling financially or that you aren’t making good financial choices.

You’ll also need to save some money so you can make a down payment. Traditional mortgages require that you put a minimum of 5 percent of the purchase price down to get approved for the loan. However, to get the best rates, you should plan to save 10 to 20 percent of the home price to pay as a deposit.

You’ll also need to do everything you can to bring up your credit score. That bankruptcy filing will stay on your credit for 10 years, so you can’t do anything about that. But you can build your score back up by paying all your bills on time and by using only small amounts of credit. You can expect to get approved for a traditional loan if your score is 640 or above. However, if you have 20 percent to put down, you may get approved for a traditional loan with a credit score as low as 540. To get the very best interest rates, your score should be about 720.

Filing for bankruptcy doesn’t have to mean that you won’t be able to do the things you want, like buy a house or a new car. You can reap all the benefits of bankruptcy for debt relief, and you can still look forward to milestones like buying a new home. Just make sure you make the most out of your bankruptcy filing and rebuild your finances and your credit once it’s final. Put that fresh start to the best use.

Call My AZ Lawyers to talk with a bankruptcy attorney about your options for debt relief. We’ll review your financial details and talk to you about your goals to help you understand whether Chapter 7 or Chapter 13 bankruptcy is right for you. We’ll work to help you get the debt relief you need as quickly as you can. Call us today to talk with a bankruptcy lawyer about your options.

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