If you have a record of bankruptcy, it may seem as if you may never be able to get back on your feet financially. However, bankruptcy does not leave a permanent record on your credit report. If you understand what measures to follow, you still might buy a property even after bankruptcy.

In this blog, we will look at ways you could buy a home even after bankruptcy in more detail. We'll also show you how long you should wait to take out a loan after filing and how to improve your chances of getting one.

What is Bankruptcy?

Bankruptcy is a legal procedure that allows debtors (those who owe money) to be relieved of debts they can no longer pay while also allowing creditors (persons that are owed money) to be compensated from the debtor's non-essential assets or property.

Choosing to file for bankruptcy is a difficult one. You may be swamped as bankruptcy appears to be your only alternative. However, consider carefully about your choices because they will have a long-term impact on you. Furthermore, bankruptcy doesn't eradicate all debt, and some forms of debt are not cleared in bankruptcy.

Bankruptcy might or might not be able to protect your property or home, you should therefore consult with a bankruptcy lawyer to see whether it is a viable choice for you. Because there are several forms of bankruptcy, one could be better for you than others would be, or bankruptcy might not be a viable option at all for your difficulties.

To establish whether you could file for bankruptcy, you must first determine:

  • The options you have when filing for bankruptcy
  • The best type of bankruptcy for your situation
  • Which debts will be eliminated if you file for bankruptcy?

Types of Bankruptcies

There are four types of bankruptcy cases, each of which is called after the section of the federal Bankruptcy Code that defines it.

Chapter 7

Individual bankruptcy, often known as Chapter 7, is the most common type of bankruptcy. It's a liquidation bankruptcy, which implies the court will sell all of your possessions for money and then distribute the cash to your lenders. Assets that are exempted from being sold under federal law or the legislation of your home state can be kept. Most of your debts can be discharged in a Chapter 7 bankruptcy. For this form of bankruptcy, there is a "means test." You must earn less than a particular amount of money to qualify. Consult a bankruptcy lawyer to see if you are eligible for this form of bankruptcy. This form of bankruptcy cannot be filed again for six years.

Chapter 11

Because of its intricacy, Chapter 11 is generally reserved for companies or partnerships, but individuals can also file. The debtor generally keeps their assets and continues to run their business while attempting to work out a restructuring plan to repay their creditors.

Chapter 12

Chapter 12 is for "regular yearly income" family farmers and fishermen. It allows financially troubled family farmers and fishermen to develop and implement a plan to repay their debts fully or partially. Debtors submit a payment schedule to lenders under Chapter 12 that includes making installment payments to creditors over 3 to 5 years. Unless the court allows a longer duration "for cause," the schedule must provide payments over 3 years.

However, unless the plan intends to pay 100 percent of any domestic support obligations like child support, it has to be for 5 years and contain all of the borrower's disposable income. A plan may not arrange for payments to be made for more than 5 years.

Chapter 13

Individuals are the focus of Chapter 13, which is similar to Chapter 11. It is a repayment plan for those who have a steady income. You pay off your obligations over a three to five year period and maintain your possessions under this kind of bankruptcy. To be eligible for Chapter 13 bankruptcy, you must have a certain amount of debt and a certain type of debt. Consult an attorney to discover if you are eligible for a Chapter 13 bankruptcy.

How Long Should You Buy a Home After Filing for Bankruptcy?

You might be concerned about being able to buy a property after filing for bankruptcy and your debts dismissed. Thankfully, even if you have to declare bankruptcy, you might be able to purchase your dream house.

You must wait until a court dismisses your bankruptcy before you may receive a mortgage. But how long will you have to wait? The answer is dependent on the kind of bankruptcy you've had and the kind of loan you're looking for.

Mortgage Alternatives After Filing for Chapter 7 or Chapter 13

Some lenders will not wait to provide you a credit card or another kind of credit after filing for bankruptcy. You should look at a variety of lending options if you'd like to try to acquire a mortgage after bankruptcy. For people who have filed for bankruptcy, each mortgage loan has its own set of rules.

Federal Housing Authority (FHA) Loans

Depending on whether you filed for Chapter 13 or Chapter 7 bankruptcy, the Federal Housing Administration (FHA) has different rules for buying a property. You have to wait at least two years after successfully filing for Chapter 7 bankruptcy and receiving a debt discharge before applying for an FHA home loan.

If you've had a Chapter 7 debt dismissal and want to get a non-FHA loan, you will have to wait 3 years or more to be accepted. In contrast to the Federal Housing Authority,  Many banks have stern lending criteria following a Chapter 7 bankruptcy.

You could have a much easier time getting a loan to buy a property if you filed for Chapter 13 bankruptcy. That's because a Chapter 13 bankruptcy necessitates the creation of a debt restructuring plan. This plan enables you to lower your overall debt and create a 3 to a 5-year repayment plan for the remainder of your debt. You could qualify for an FHA loan one year into your Chapter 13 restructuring plan if you don't fall back on your payments.

The credibility you build by paying your obligations on schedule with a Chapter 13 schedule influences whether or not additional creditors would lend to you. It's crucial to remember that the bankruptcy court and the Chapter 13 administrator will have the power to impact your ability to obtain a mortgage under a Chapter 13 reorganization plan.

Regardless of whether you are qualified for a Federal Housing Authority loan or a bank loan, the judge and administrator must assess if you are capable of handling another financial responsibility.

Conventional Loans

People who have filed Chapter 13 or Chapter 7 bankruptcy can get conventional loans from government-related companies like Fannie Mae or Freddie Mac. Many of these firms, however, have firm restrictions that could force you to wait a couple of years for a loan.

After getting a Chapter 7 dismissal, you may have to wait up to 4 years to apply for a conventional loan. You could be qualified only after 2 years under certain exceptional conditions. A severe health condition that drove you into foreclosure or bankruptcy is an instance of an exceptional situation that might reduce the waiting time.

Furthermore, you must wait 2 years after the date of your debt dismissal or 4 years from discharge after filing for Chapter 13 bankruptcy.

Veterans Administration Loans

VA loans have fewer restrictions than conventional mortgages. For instance, 2 years after getting a Chapter 7 debt clearance, you could be qualified for a VA loan. You must, nevertheless, clarify why you declared bankruptcy and also have a strategy in place to repair your credit.

After filing for Chapter 13 bankruptcy, you should have a 1-year record of timely repayments and the loan must be approved by the bankruptcy court.

USDA Loans

Loans from the United States Department of Agriculture (USDA) are meant for rural borrowers who satisfy specific income standards. It might be an excellent choice if you want to purchase a property in a rural region but don't qualify for a conventional loan due to a low or moderate income. You might not have to put money down and you could be able to get a cheap interest rate if you take this route.

If you're thinking about receiving a USDA loan after bankruptcy, keep the following in mind:

  • Chapter 7: 3 years from the date of discharge
  • Chapter 13: 1 year from the date of discharge

What Mortgages are Available for You After Bankruptcy?

After filing for bankruptcy, every form of mortgage loan is almost possible to get. There are no laws in place that prevent you from receiving a specific sort of loan in the future because you filed for bankruptcy. You are free to apply as long as you satisfy the above-mentioned waiting time. However, certain forms of mortgage loans are significantly simpler to qualify for than others.

If you have a bankruptcy record, an FHA loan may be a good choice. Waiting periods for FHA loans are less than for other kinds of loans. After a judge discharges or dismisses your Chapter 13 bankruptcy, there's no waiting time at all. In comparison to other forms of government-backed loans, FHA loans have fewer restrictions.

After filing for bankruptcy, one of the primary advantages of receiving an FHA loan is the reduced credit standards. Even if your bankruptcy is dismissed or discharged by the court, you will still have a bad credit rating score. A Chapter 7 bankruptcy will be on your credit report for ten years, whereas a Chapter 13 bankruptcy will remain on your credit report for seven years.

How to Apply for Mortgage After Filing for Bankruptcy

Let's explore the particular procedures you'll do while applying for your loan. 

Improve Your Credit Score

Your credit score will be lowered if you have a bankruptcy record on your credit report. However, you may receive a mortgage loan even if you have a bankruptcy on your report, but you must still fulfill the lender's minimal credit score criteria.  In case your credit score is 580 points or lower, you'll almost always need to take a little time to improve it before applying for a loan.

Here are a few essential steps to help you start repairing your credit:

Rebuild your credit. Many of your former accounts may be entirely wiped from your credit record after a bankruptcy.  Among the first things you should do is re-establish credit properly. Getting a secured credit card is a good method to start rebuilding your credit. You make a deposit using your credit card when you open a secured credit card. This money becomes your credit line. You then make monthly payments to your account and pay off your debt. Even after a bankruptcy, you could acquire a secured credit card with a poor credit rating.

Reduce your debt. After your bankruptcy is finished, put any additional money you have toward debt repayment. This demonstrates to creditors that you're committed to improving your financial position and improving your credit score with time. Reduced debt levels might also help you in obtaining a mortgage.

Make sure you pay all of your bills promptly. Making your loan and credit card payments on time each month is the quickest and easiest method to improve your credit rating. If you're having problems keeping track of your payment deadlines, consider applying for auto-pay. The majority of credit card and loan providers offer an auto-pay function that subtracts your minimum monthly payment on the due date.

Write an Explanatory Letter

When applying for a mortgage, your lender examines your finances thoroughly. Lenders incur a risk each time they offer a mortgage. Lenders want to be assured that you will make your monthly payments on time. A bankruptcy record, of course, is a huge warning.

By producing a letter of explanation, you can boost your odds of receiving a mortgage after bankruptcy. A letter of explanation provides your lender with more information regarding your bankruptcy and the reason you had to file for bankruptcy.

You may wish to add information on the events that led to your bankruptcy and also how your financial situation has evolved since then. Detail the actions you've done to avoid bankruptcy in the future, such as paying down debts and creating an emergency fund.

Although an explanatory letter isn't required to obtain a mortgage after bankruptcy, it might assist your lender in seeing the bigger picture rather than simply a set of statistics. When requesting a pre-approval, attach your explanatory letter with your application.

Get a Pre-approval

When the waiting period is over and your finances are in check, you may then put in an application for your mortgage pre-approval. A pre-approval letter from a creditor informs you of the amount of money you may borrow in a mortgage loan. Pre Approval is necessary for several reasons:

  • A preapproval letter, for starters, helps you understand which properties are within your budget, allowing you to narrow down your property search.
  • Secondly, a preapproval informs real estate brokers and sellers that you will be able to acquire the funds necessary to purchase the house you wish to make an offer on.

When you seek a preapproval, your creditor will ask for certain financial documents. If you have all of your paperwork ready before applying, you will get pre-approved faster. your lender will request for your:

  • Bank statements
  • W-2s
  • most current pay stubs

It's important to note that prequalification and preapproval are not similar. Asset verification is often not required for pre-qualifications. As a result, they carry less weight than a preapproval. Ensure you are preapproved rather than prequalified.

Answer Any Inquiries from the Lender

when you've submitted your pre-approval application, the remainder is in your creditor's hands. To discover if you are eligible for a mortgage, your creditor will look at your earnings, possessions, debts, and credit. Your lender will issue you a preapproval letter if you appear to be a suitable candidate. You can then begin looking for a home.

Your lender may need to reach out to you to inquire about issues with your credit history. This is common following a financial setback such as bankruptcy. To increase your chances of acceptance, be honest and respond immediately to your lender's queries.

Getting a mortgage is a huge financial commitment. Take time to restore your rating and enhance your finances if you want to obtain a mortgage after filing for bankruptcy. You may start your road to homeownership if you're certain that you can easily manage mortgage payments, taxes, and the numerous additional expenditures connected with owning a home.

Contact a Los Angeles Bankruptcy Lawyer

If you need help buying a house after declaring bankruptcy, you should consult with our expert bankruptcy attorneys in Los Angeles. We recognize how tough it may be to restructure your life after bankruptcy, but we're here to help. Our law firm has handled several forms of bankruptcy-related disputes, and we'll use that knowledge to defend you. Call the Los Angeles Bankruptcy Attorney at 424-285-5525 for more information.