Purchasing a Home after Bankrupty

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Myth – You can’t buy a home for 7-10 years after a Chapter 7 bankruptcy.

Fact – You can buy a home with as little as 3.5% Down Payment just two years after the Chapter 7 bankruptcy is Discharged.

It‘s really pretty easy to get qualified for a FHA purchase money mortgage just two years after bankruptcy.  First, you need to establish new good credit and demonstrate you are using the new credit appropriately.  Next save up the down payment – Do you have family willing to help you with the Down Payment?. Now find a mortgage lender you are comfortable working with which understands the mortgage rules and bankruptcy. Finally bring a Realtor aboard to assist you in your home search.

There is understandable confusion as FHA rules do not require new credit to be established to get FHA’s blessing. Let me help clear up this confusion: FHA does not make home loans, they insure home loans so investors will make home loans. Lenders/investors have their own rules on top of the FHA insurance guarantee and they require established new good credit with much greater FICO Scores than FHA finds acceptable.

The best advise is this: as soon as you get your Chapter 7 Discharge, you need to establish and act on your personal plan to rebuild your credit.

In a future blog I will discuss how to refinance your mortgage while you are still in a Chapter 13 bankruptcy.

Many of my blogs are all about helping good folks such as you to rebuild your credit after a catastrophic credit disaster such as bankruptcy, foreclosure or short-sale.

Image Credit: Google Images

 Financially SpeakingJames Spray RMLO, CNE, FICO Pro | CO LMO 100008715 / NMLS 257365 | August 30, 2010
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your legal interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.

4 comments on “Purchasing a Home after Bankrupty

  1. Jan says:

    I have a question about purchasing a home with a VA loan, 2 years after bankruptcy. We owned a home in California that was included in the bankruptcy. We were advised by our bankruptcy lawyer that soon after the bankruptcy, we would be contacted by the bank to take possession of the home. 2 years later that has not happened. We are still liable for the home and continue to care for the property. The reason we filed bankruptcy on the home is that we are active duty military and were required to move overseas. We rented the home out for less than the rental market allowed. Most homes in our neighborhood had homeowners had those interest only loans, paying far less than we were with a 30 year fixed mortgage. After a year or so we realized we could no longer pay the difference between the mortgage and the rental income. We had depleted savings, 401K’s, credit cards trying to “save” our home. We put the home on the market and it fell out of escrow due to dropping market value. At some point, it was clear, we could not sell or rent our home and it was time to file bankruptcy. In January, we began our search to find out if we could own a home again. We have scores in the high 600’s, no late payments, income over 100k. We were told our issue “was no problem”, by CB&T mortgage. We got pre-qualified and found a home. We put out monies on inspection and VA appraisal. The VA approval came though fine. However, we could not find an investor that would pick up the loan due to VA overlay’s. We contacted have a credit union that said it has no VA overlay’s. We are concerned that we are being given false hope and the issue of the home still being in our name will halt the loan. The seller of the home did not want to extend the contract and wait for our approval and pulled his home from the market. We had already given notice on our rental and are in limbo. We are left to wonder what to do in our circumstance. We would be glad to give back the home to the bank but concerned it would start the clock over on the time requirements– my guess is it will appear as a forclosure. Please advise.

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    • James Spray says:

      You brought up good points, I will try to address each.

      Unfortunately, Jan, the clock has not yet started running as the deed is still in your name. So long as the deed remains in your name, you have not begun recovery in a manner that will regain your VA eligibility. Verily, based on your statements, the two year window of the bankruptcy has passed however the lender has not foreclosed and you have not sold the property. Until the deed has been out of your name for three years in the event of a foreclosure, deed-in-lieu of foreclosure (DIL) or traditional short-sale you are not lendable (unless underwriting misses the facts – it can happen but it is rare, I’ve only seen one such in 35 years).

      You have a real delimma, one faced my many thousands and thousands of people throught the US. I know of these “Zombie Mortgages” going back four and five years and have heard of eight years.

      You can regain VA eligibility after about two years from the bankruptcy. Your problem is, again, the deed of the bankrupted Note still being in your name. Three years must transpire if the property is sold for less than full market value.

      You can’t force the lender to foreclose, you can indeed see about getting them to accept a DIL but you can’t force them to accept the DIL. Another thought is you might need to consider a short sale, particularly if this the owner (not lender) of your mortgage is either Fannie Mae or Freddie Mac. You can check to see if this is the case by going to Making Home Affordable.gov. Finally, you may wish to talk with a highly seasoned short-sale expert.

      Finally, I suspect it is far more likely that the investor(s) have far more overlays than VA. In fact, I know they do so I am not sure why you were told the opposite. There are many front-line mortgage sales people at banks, mortgage companies and credit unions that do not know the regulations under which they work. In Colorado, we call this lack of knowledge malpractice.

      My best wishes are with you.
      Jim

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  2. Josue Baez says:

    I will like to know how much it will cost me to hire you to make a plan for me to recover from chapter 7 bankrupcy. Please…

    Like

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