There are many myths surrounding bankruptcy. One of the most serious myths is that an individual with a history of bankruptcy cannot qualify for a home loan. This myth can prevent someone deep in debt from obtaining needed relief.
The truth is that while lenders hate bankruptcy, they love federal guarantees. The Federal Housing Administration (FHA) is a government agency that insures certain home loans, and its policy for qualifying for a home loan is very flexible. The FHA will guarantee a home loan after a bankruptcy when:
- Twenty four months have passed since the bankruptcy has been discharged;
FHA-insured home mortgages are also available to Chapter 13 debtors during bankruptcy. The debtor must (1) have completed one year of payments as required while under Chapter 13 and (2) must obtain a letter from the Trustee of the court, stating the dollar amount the applicant can borrow.
In addition to the above, individuals must meet the mortgage lender’s criteria. This usually means showing a stable employment history, a manageable debt to income ratio, and a good credit score. Surprisingly, most debtors are able to improve their credit scores quickly after a bankruptcy discharge. Your credit score is weighted heavily on recent events, so when you file bankruptcy your score will immediate plummets. However, the farther you are from your bankruptcy discharge, the better your score will become. Additionally, an absence of credit delinquencies and a solid history of on-time payments after your bankruptcy case will boost your credit score.
Any person who has filed for bankruptcy protection and has the desire to buy a new home should start preparing themselves six months in advance. I say six months because unless you have been monitoring your credit report you will probably need some work done to get the credit score to an acceptable number. Making corrections on the credit report can take anywhere from one week to two months depending on the circumstances. The sooner you start working on it the better your chances of buying at the 2 year anniversary date. Other things to consider to make the jump back into home ownership smoother are; Be prepared with paperwork. Make sure you have all of the required documents in a place easy to find and you are ready to go. These include, but are not limited to:
- Complete Federal tax returns (1040s plus all schedules) for two years
- Complete set of Bankruptcy papers including Discharge and all Schedules of Debtors
- A letter explaining the circumstances around bankruptcy filing (your loan officer will review this with you so you know it’s explained together properly and completely)
- Paycheck stubs for one full month
- Bank statements for two full months
You may find a need for more documentation depending on your circumstances but these are items most everyone must supply.
If you or someone you know had a bankruptcy that was discharged on or before June 2010 now is the time to start working on your finances and credit to get yourself ready to buy a new home. Contact Duckworth Lending Group at (480) 359-5682 for help with your personal situation.