Last updated Oct. 30, 2017.
You probably already know that filing for bankruptcy is going to affect your credit score. Most people emerge from bankruptcy with a credit score in the range of 500 out of a possible 850. Your credit score affects your ability to borrow and the rate you’ll be able to get. If you want to purchase a new home, how will your past bankruptcy affect the process?
Keeping Your Home in Bankruptcy
First, note that filing for bankruptcy doesn’t necessarily mean you’re going to lose your home. If you file under Chapter 7, Ohio exemptions protect up to $136,925 of equity in your home. The equity is the amount you actually own outright.
For example, if you borrowed $200,000 to purchase your home and you still owe $150,000, you have $50,000 of equity in your home. That means your home will not be sold to repay your creditors.
Under either Chapter 7 or Chapter 13, you can choose to keep making your mortgage payments and keep your home. If you stop making payments, the bank will be able to foreclose. If you didn’t own a home when you filed or if you surrendered your home in or after bankruptcy, you may be looking to purchase a home now that your finances are back on track.
Applying for a Home Loan After Bankruptcy
Your bankruptcy is going to stay on your credit report for 7 to 10 years. When you apply for a loan, the bank is going to check your credit history and see the bankruptcy. However, that may not mean that you’re stuck without access to a mortgage loan for 10 years.
For loans from the Federal Housing Administration (FHA), you’re eligible to apply for a mortgage after 12 months of full, on-time payments under a Chapter 13 plan. If you filed under Chapter 7, you’ll have to wait 2 years after your discharge to apply.
For loans from Fannie Mae, you’ll need to wait at least 4 years after your Chapter 7 discharge or dismissal. You may be able to get a loan after just 2 years of extenuating circumstances, such as serious illness, led you to file for bankruptcy. If you successfully completed your Chapter 13 payment plan and received a discharge, you’ll be able to apply for a mortgage after 2 years. If your Chapter 13 bankruptcy was dismissed (typically because of failure to make plan payments), you’ll have to wait 4 years after the date of the dismissal. Again, you may be able to get a loan sooner if your bankruptcy was attributable to extenuating circumstances.
If you want a loan from the U.S. Department of Agriculture, you only have to wait 3 years from your bankruptcy. As with a loan from Fannie Mae or the FHA, you may be able to get a loan after 12 months of on-time payments in Chapter 13, depending on your circumstances. For example, if you were forced to file for bankruptcy due to job loss, serious medical issues, or the death of a spouse, you may be able to get a mortgage loan less than 3 years after your bankruptcy discharge.
For private loans, you’ll have to wait at least 4 years after your Chapter 7 discharge and at least 2 years after your Chapter 13 discharge, depending on the policies of the lender.
In any case, you’ll still have to meet all the standard mortgage loan requirements, such as general creditworthiness and a reliable and sufficient source of income. Each of these mortgage loan providers also has its own requirements. For example, you may only be eligible if your income is below a certain level or you intend to use the property for certain purposes.
When should I apply?
As mentioned above, your credit score will be in the range of 500 when you complete the bankruptcy process. Most mortgage loan providers require a score of at least 620 to even be considered for a mortgage loan. In addition, just because you can get a mortgage loan doesn’t mean you should get a mortgage loan. If you wait for a couple of years and build your credit history to boost your score, you can get a significantly better interest rate. That will save you thousands, if not tens of thousands, of dollars in interest payments.
If you borrow $200,000 to purchase a home in Ohio today and your score is in the 620-639 range, you’ll get a rate of 5.235%. That works out to almost $200,000 in interest over the course of a 30-year loan. That’s right — you’ll pay as much interest as you will principal. If you wait for a couple of years until your score is in the range of 680-699, you’ll save more than $50,000 in interest. If you can get your score up to 760 or above, you’ll save almost $70,000.
This calculator will show you what you’ll pay in interest depending on your FICO score.
Bottom Line: Filing for Bankruptcy Protection Won’t Stop You from Getting a Home
For most people, a home is the largest purchase they’ll ever make. It will be the most valuable asset they ever own. Mortgage payments are the largest bill that most people face every month.
The good news is that filing for bankruptcy protection doesn’t mean you won’t ever be able to purchase a home. Just take good care of your credit score and make sure to shop around to get the best possible rate on your mortgage loan.
If you are considering filing for bankruptcy, contact an experienced bankruptcy attorney in Dayton, Ohio today. Cope Law Offices, LLC offers free debt evaluations to determine if bankruptcy is right for you. Contact us today.