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Can I ever buy a house again?


Buying a house after bankruptcy


The players

Yes, and sooner than you might expect.  The 3 primary ways are through FHA, USDA, and VA.  They are federal programs that help make mortgages happen.  You don’t go through them directly, but they are options you choose through your bank.  You might be wondering why these programs are such good options.  Well, it may be as simply that they all are federal programs and Bankruptcy law is federal law...aka Title 11 of the United States Code.  It wouldn’t make any sense for the system to discriminate against itself.


The details

The big question is, “When?”  There are two dates, depending on whether a Chapter 7 or a Chapter 13 was utilized.  First, there is the Chapter 7 bankruptcy, which, for most people lasts just around 3 months from beginning to end.  The completion of a case has the, “Discharge.”  The earliest point to aim for an FHA, VA, or USDA is 2 years after your Discharge.  In those 2 years you can set yourself up for success with just a little attention to your credit reports and FICO scores.  The goal is quite obtainable because the minimum FICO credit score needed for FHA is 580.  With 2 years you could blow past that and be into the 700’s.  Conventional mortgages require 620+ and more years of waiting.


Other good news

Mortgage lenders tend to require that a borrower not have any outstanding debt at the time of application, other than things like installment loans.  Cars and student loans are the most common examples.  Back to the regular, unsecured debts.  Well, odds are that the bankruptcy already took care of that so it is up to you to use credit modestly while rebuilding in those 2 years.  For example, aim to not exceed 10% of the balance limits on revolving lines of credit like credit cards.  This will also put you in a position to have those balances at $0 for your mortgage application.  A huge benefit of the 3 programs is they require zero or low amounts of money as down payments.  USDA and VA are zero down, and FHA is at 3.5% for 580 score and higher.  Here is an example with the math done.  On a hundred and fifty thousand dollar house that may mean saving, and then putting $5250 down, for closing.  With 2 years heads-up from bankruptcy discharge to loan then you would want to budget in saving just under $220 per month into a savings account.  An account with some interest helps even more, like a money market account or CD’s through your bank give you higher interest than a savings or checking accounts.


Interest rates

If you know a bit about credit scores, then you know that the higher the score, the lower the interest rates tend to be.  As of the time of this writing the FHA interest rate is around 3%, so right near the best rates available for consumers.  For comparison, the conventional mortgages that required a 620 credit score might have an interest rate a percent or two higher.  A credit score for a conventional mortgage borrower would probably need to be in the 700’s to be as low as the FHA, VA, and USDA.  Take a second to absorb that information.  Using these programs, with a credit score of just over 580, your interest rate would be right with those people with scores in the 700’s.


Chapter 13 and 1 Year

If someone has filed a Chapter 13 bankruptcy case then there is another option along the way.  If you are in the middle of a case, then a discharge can’t have happened yet, but there is another way to qualify.  It requires the person to have made 1 year of on-time plan payments to the Trustee.  For many people that shouldn’t be too much to ask because Chapter 13’s are designed to adapt to a person’s income and reasonable expenses.  An experienced and clever attorney can help make sure you are set up right.  Back to inside of the Chapter 13 case, a few months before the 1 year mark, or whenever someone would like to make the move, then you should discuss with their attorney what other things the Court might want, like a Motion to Incur Debt.  That isn’t scary or anything, but a little step for the Judge to review and consider giving a, “thumbs up” on the purchase.  This step is supposed to be for your benefit and the Judge looking at what is in your best interest because  focus might be on how it would affect the person’s budget as to not be too much of a monetary burden going forward, so a successful case discharge is still likely.


So, yes, the first step might always seem like the hardest; but it doesn’t have to be. To find out more, contact the Law Offices of John T. Orcutt. Read reviews from satisfied clients, then call +1-919-646-2654 to schedule a free student loan bankruptcy consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.

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