Bankruptcy and House-Buying: What You Should Know
Most mortgage banks follow the Fannie Mae rules, which include a two- or four-year waiting period for a home mortgage that applies in most cases. Usually, the clock begins ticking after the judge issues a dismissal or discharge order. Generally, Chapter 13 filers must wait two years and Chapter 7 filers must wait four years. However, Fannie Mae cuts the Chapter 7 waiting period in half in some cases. More on that below.
Bankruptcy protects your assets, stops foreclosure and other adverse actions, and gives distressed debtors a fresh start. A Chicago bankruptcy lawyer helps debtors maximize that fresh start. A lawyer diligently and accurately prepares and files the complex paperwork, speaks for you in meetings, stands up for you in court, and gives you the tools you need to get back on track.
The Waiting Period
Fannie Mae and other mortgage company guidelines don’t single out bankruptcy. Instead, the Fannie Mae guidelines place bankruptcy alongside “foreclosures, deeds-in-lieu of foreclosure, preforeclosure sales, short sales, and charge-offs of mortgage accounts.” In other words, a non-bankruptcy short sale is just as bad as filing bankruptcy, as far as most mortgage companies are concerned.
Additionally, many Chapter 7 filers are eligible for a two-year waiting period reduction. So, with a Chicago bankruptcy attorney’s help, the mortgage waiting period is shorter for bankruptcy than for all the other aforementioned significant derogatory credit events. The reduction is available if the potential borrower establishes extenuating circumstances, such as:
- A situation beyond the debtor’s control, such as job loss, substantially caused the bankruptcy filing,
- The bankruptcy repayment plan didn’t include any past-due mortgage debt,
- The debtor makes a substantial down payment,
- The debtor rebuilt his/her credit score faster than expected, and
- A financial profile, including a DTI (debt-to-income) ratio analysis, shows the debtor can easily afford the payments.
Credit score rebuilding might be the most compelling extenuating circumstance. The bottom line is that mortgage banks are anxious to lend money to damaged credit borrowers. Banks can charge higher interest rates on these loans. However, they must have some assurance the borrower won’t default.
A Post-Bankruptcy House Purchase Guide
Once the two- or four-year waiting period expires, house hunters with recent prior bankruptcies have limited choices. As mentioned, mortgage banks are eager to make high-risk loans. But they won’t loan money to people who just filed bankruptcy and want to buy Wayne Manor.
To quickly rebuild credit scores, we usually tell people to get credit cards. Charge something each month and pay off the balance each month. Credit scores inch up with each on-time payment. But be careful. Even one late payment makes credit scores plummet.
Another alternative is waiting a little more than two years and putting more distance between the bankruptcy and the new purchase. A Chapter 13 filing usually falls off a credit report after ten years. Usually, that clock starts ticking with the filing and not with the discharge. So, an additional few months could make a big difference.
Count on a Diligent Cook County Lawyer
No matter what kind of financial problem you are having, there’s usually a way out. For a free consultation with an experienced bankruptcy attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. The sooner you reach out to us, the sooner we start fighting for you.
