One of the biggest obstacles for people considering bankruptcy is mythology. Sometimes it seems that the moment someone in tough financial circumstances decides to take control, misguided advice starts flying. Of course, family and friends usually mean well. But, that doesn’t make their information accurate. And, too often, it comes in the form of dire warnings like, “Bankruptcy ruins your credit for 10 years,” and “You’ll never be able to buy a house!”
As of late 2019, 56.3% of California households lived in a residence they owned. In Los Angeles, just under half of the residences were owned by one of the occupants. Though these rates are significantly lower than the U.S. average and just 10 states have a higher percentage of renters, homeownership is on the rise in California. So, it’s no surprise that most people are cautious about taking a step they think may limit their options.
Confronting financial issues head-on can be daunting to begin with, and people often wrestle with debt for years before resolving to take action and regain control. For many people, those dire predictions are enough to cut the process short, which could mean additional months of financial stress, more money poured into interest and late fees, and even negative consequences like wage garnishment or repossession. Reliable information can make all the difference.
The Truth about Bankruptcy and Mortgage Loans
Of course, there’s no hard and fast rule that will tell you exactly when you will qualify for a mortgage loan after bankruptcy. It’s true that a Chapter 7 bankruptcy can stay on your credit report for 10 years. A Chapter 13 bankruptcy ages off the report after seven years. But, there’s a big difference between “stays on your credit for 10 years” and “ruins your credit for 10 years.”
There are many variables even without bankruptcy in the mix, including income, credit history, other monthly obligations, how long you’ve had your job, the value of the home you hope to buy, and more. There are some minimum waiting periods, but they’re much shorter than many people have been led to believe.
Post-Bankruptcy Mortgage Thresholds
There are different post-bankruptcy waiting periods for different types of mortgage loans. Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) loans are among the most lenient. A borrower may be eligible for a mortgage loan under either of these programs just two years after a Chapter 7 bankruptcy discharge. Since many Chapter 7 cases are completed in 4-6 months, that means some people are eligible to purchase homes through one of these programs about 2.5 years after filing their bankruptcy petitions. Many people are also able to qualify for these loans just a couple of years after mortgage foreclosure, too.
Of course, just passing the two-year mark won’t qualify you for a mortgage. But, once two years have passed, a past Chapter 7 bankruptcy isn’t an automatic disqualifier for an FHA or VA loan.
Conventional mortgage lenders tend to be a bit tougher, generally imposing a four-year waiting period after Chapter 7 discharge. Still, that’s a far cry from the “10 years” or “never” bankruptcy mythology suggests. For many people, the two to four year waiting period provides just about the right amount of time to rebuild credit and accumulate a down payment. For most, that rebuilding would have been necessary with or without bankruptcy, since most people who file have already fallen behind on accounts and have significant outstanding debt and negative entries on their credit reports.
For those who enter into a Chapter 13 repayment plan, the road may be even shorter. Both the FHA and the VA consider applicants who are in Chapter 13 bankruptcy if their plan payments have been made on time for at least one year. Taking out new credit during a Chapter 13 case generally requires court approval, so if you’re considering attempting to purchase a home while in bankruptcy, your first step should be to consult with your bankruptcy attorney.
The Bottom Line on Bankruptcy and Home Loans
If you’re overwhelmed by debt and haven’t been able to stabilize your finances, the fact that you want to own a home one day should not deter you from considering bankruptcy. Many people are able to purchase a home within just a few years after bankruptcy. Simple steps, such as monitoring credit reports, building up funds for a down payment, and strategically re-establishing credit can help pave the way to homeownership.
At Borowitz & Clark, we know how important it is that you have accurate information and understand how the general rules might apply to your specific situation. That’s why our experienced Los Angeles bankruptcy attorneys offer free, no-obligation consultations. You can schedule yours right now by calling 877-439-9717 or filling out the form on this page.