Buying a House After Filing Bankrutpcy

How soon can I buy a house after filing bankruptcy is a question that many people often ask.  There is no clear answer to this question.  It depends upon a number of things like how well your credit score improves following bankruptcy, what your income situation is, and what other debt you have incurred after your bankruptcy discharge.  Other considerations are whether you still are the owners of a house that is still in foreclosure.

What is the Hurry to Jump Back Into Debt?

Generally speaking, the largest debt people have is owning a home.  Not only is there the mortgage payment, but you also have homeowner’s insurance, real estate taxes, and home maintenance which can add 30% more to the actual mortgage payment.  There may also be homeowner association fees.  So why are we in such a rush to take on huge debt?

Our society has placed a premium on home ownership.  Be it good or bad, we have this notion that we have to be homeowners.  In fact, our real goal should be saving money for emergencies, future necessary purchases, education, and retirement.  If you can rent comfortable accommodations for $200 per month less than it would cost you to purchase a home, you could save $2400 per month (easy math).  Likewise you don’t have a 15 to 30 year debt obligation that may be very difficult to get out from under depending upon the real estate market.

I am not against home ownership, but I am definitely in favor of making smart financial decisions and saving for the future.  Real estate can be a good investment, but how many people actually make money when it is time to sell?

Improved Credit Score

As I stated earlier, one consideration in the equation will be your credit score if you are going to borrow money.  How quickly your credit score rebounds after filing bankruptcy all depends upon what you do.  If you want to improve your credit score, you must obtain credit sparingly and use it wisely.  You have to pay your credit accounts on time and keep your running balances low.  In other words, borrow a little and pay it off every month.  Use cash more frequently than you swipe a credit card.  There is no magical formula, but you have to live below your means.

Your Income Situation

Again, when you apply for a mortgage, assuming you are going to borrow money to purchase a house, your income needs to be more than adequate.  Following the mortgage crisis of the early 2000’s, lenders are now requiring that your mortgage payment cannot exceed about 30% of your income.  That is a huge change compared to the loose lending practices before the crisis.  So, if your household brings in approximately $40,000 a year, your mortgage payment needs to be less than $1100 a month.

Other Debt Incurred Post Bankruptcy

Another consideration lenders consider when deciding to lend money is your debt to income ratio.  As stated above, your income will be a major consideration.  Also included is the amount of debt you have.  Following bankruptcy your debt position should have improved, but over a couple of years it may be creeping up again.  You may have needed to replace a car or two.  Or you could have suffered some major medical expenses after your bankruptcy that affect your debt position.  Regardless, it is important to minimize the amount of debt you are carrying if you plan on buying a home.

New Time Limits

One of the biggest factors out there affecting how soon you can purchase a home after bankruptcy is the lenders requirements.  I have been told by many of my previous clients as well as associates in the mortgage industry that most, if not all government secured loans now require a four year waiting period after bankruptcy before they will approve a loan to purchase a house.  Obviously there are non-government backed loans that will play, but who knows what the terms will be.  And, remember the saving money talk earlier, you may have the willpower to save the money outright and purchase on a cash basis.  Wouldn’t that be great.  You can also explore rent to own options.

The Bottom Line

There is no sure answer to the question “How Soon Can I Buy A House After Filing Bankruptcy?”  Regulators are going to impose certain barriers, but most of the answer will be found in how well you manage your financial affairs after filing bankruptcy.

Will I Lose My House if I File Bankruptcy?

This is a common concern for many people who are contemplating whether or not they should file bankruptcy.  The vast majority of people who own a home have one or two and sometimes three mortgages secured by their home.  Because of these mortgages, there is generally little equity or value beyond the amount owed on the mortgage(s).

Chapter 13 bankruptcy is available to most people who have a steady stream of income.  One of the goals of Chapter 13 is to allow people to keep their property while they pay some money back on the debts they owe.  So no you will not lose your house if you  file Ch 13 as long as you have sufficient income to meet your basic living expenses and can still afford to make the mortgage payments.

If Chapter 7 bankruptcy is the option you prefer, you will generally not lose your house as long as you are current on the payments, and your income is enough to allow you to continue making the mortgage payments and cover your basic living expenses.  In Ohio you also have exemptions of approximately $20,000.00 (single) and $40.000.00 (married) that allow you to claim as exempt against any equity you have in your residence.  So unless your house is will sell for an amount far exceeding the amount you owe on it, and you can continue to make the mortgage payments, you should not lose you house if you file Ch 7 bankruptcy.

But what about the Trustee, can’t he/she take my house anyway?  The trustee works for your creditors.  The Chapter 7 trustee’s job is to find assets he/she can turn into cash to pay to your creditors.  In order for the trustee to benefit from taking your house he has to be able to sell it for a profit after he pays the mortgage(s), taxes, and you for your exemption amount.  Typically you will not lose your house because the trustee will not profit from selling your house.

Please contact me at 740-369-6812 to discuss your situation and answer any further questions.