How Soon After Bankruptcy Will You Qualify for a Mortgage?

 

by Richard Welt, Attorney at Law, McFerran Law, P.S., Seattle
 

One of the most difficult decisions for a bankruptcy filer involves
surrendering a home.* Nobody wants to take this step, and it may not
be necessary, but sometimes there is just no choice. Home ownership
involves not only a mortgage payment, but it also includes repair

expenses, homeowners’ association dues and utility bills.

 

Giving up your home may be traumatic – even if you recognize the 
financial realities. Your family life will be disrupted, the kids may have to
change schools, and you will have to sell or store furniture and other 
personal property that may not fit into a rental.

 

One of the questions I get whenever a client has to surrender his home is, “When will I be able to qualify for a mortgage so I can buy another house?” Many people are under the misconception that home ownership will be delayed five or ten years or more. The reality is much less harsh.

 

The answer to the question of when you can again qualify for a mortgage will depend on two factors:

 

1.  Credit Worthiness    

      If you use your bankruptcy to eliminate debt and reduce expenses, you will be in a much better position to manage
      credit. Obtain a secured credit card, arrange for a loan with a credit union, remain employed and within 6 months to
      a year after your Chapter 7 discharge, your credit score will bounce back enough to make you a viable borrower.

 

2.  Loan Programs

     a.  Conventional loans require a wait of four years from date of Chapter 7 discharge or four years of consistent
          Chapter 13 payments.

     b.  FHA loans and VA loans require a two year wait from the date of your Chapter 7 discharge or two years of
           consistent Chapter 13 payments.

     c.  An FHA program called the FHA Back to Work Program (which is set to expire on September 30, 2016) allows a
          borrower to purchase a primary residence just 12 months after Chapter 7 discharge or 12 months into a
          Chapter 13 plan, if you can document the economic reasons for your financial hardship.

 

So, as a practical matter, most bankruptcy debtors who have given up their homes in bankruptcy can be eligible for a new mortgage as early as one to two years after their bankruptcy has been discharged or a year or two into a Chapter 13 repayment plan.

 

As difficult as it may be to walk away from your home, take comfort in the realization that your return to homeownership will not be unduly delayed.

 

*It's important to note that homes are not "lost in bankruptcy," as bankruptcy is governed by federal law, while foreclosure is governed by state law. These are separate matters best addressed in consultation with your attorney.