Home Loans After Bankruptcy

Filing bankruptcy does not always result in the petitioner having to give up home ownership. Whether a person retains ownership of the house or whether the home is repossessed in lieu of debt obligations, depends on a number of factors.

Retaining Home Ownership Despite Filing Bankruptcy

Filing Chapter 13 allows the owner to retain possession of the home, since Chapter 13 is a wage-earner’s plan. This plan allows the petitioner to discharge debt obligations under a different set of covenants, within a maximum period of 5 years. Filing Chapter 7 and signing a reaffirmation agreement, results in the debtor being bound to the mortgage despite the filing. The debtor continues making mortgage payments, regardless of the filing, thus retaining home ownership. This may be advisable, since filing Chapter 7 allows the petitioner to retain only a part of the equity in the primary residence. Moreover, making regular mortgage payments is also desirable from the perspective of improving credit scores.

People who are interested in buying a home after bankruptcy find it hard, especially in the current scenario when most lenders are unwilling to lend money to less creditworthy individuals. However, following tips can be helpful in fulfilling your dream.

How to Procure Such Loans?

This is a difficult task since the borrower would have to ensure that his/her FICO score is at least 620. Although this seems plausible, one must bear in mind that filing bankruptcy results in the borrower’s credit score declining by 300 points or so.

As we are well aware, in the current scenario, a credit score of 780 or more guarantees the aspiring homeowner the lowest rate of interest on mortgage loans. Applying for such loans puts the borrower at the risk of having to discharge obligations at an unfavorable rate of interest. In fact, he may have to pay a substantially high rate of interest, on account of less than satisfactory credit scores and the lack of creditworthiness as perceived by the lender. People who manage to retain their home in this condition, may be interested in refinancing their mortgage to a lower and more favorable interest rate. FHA (Federal Housing Administration) insured loans can be used for this purpose.

First-time home buyers can avail it, provided four years have elapsed since their bankruptcy discharge, while people who sought relief under Chapter 13, would have to wait for at least 2 years. FHA insured loans have less stringent terms, and a borrower is only expected to have made 12 or 24 consecutive payments on all accounts, since the time of filing Chapter 13 or Chapter 7 respectively. Eligible veterans may benefit from VA (Veterans Administration) loans. This is because a person is required to wait for just 2 years to procure this loan. The debt-to-income ratio is another important factor that is considered, since it indicates the ability of the borrower to discharge mortgage obligations. A low debt-to-income ratio is favorable while a high ratio is undesirable.

In addition to these factors, people desirous of procuring these loans may be required to provide the reason for filing bankruptcy and furnish supporting proof. It’s evident that the filing makes it much harder for people to procure mortgage loans. Hence, one should always try and explore alternatives to avoid the unsavory consequences.


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