Buying a Home after Bankruptcy

Did an "economic event" (a loss of 20% of your income) cause your bankruptcy or foreclosure?

"FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances. As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage. To that end, FHA is allowing for the consideration of borrowers who have experienced an “Economic Event” and can document that:

- an excerpt from a letter by Carol J. Galante, Assistant Secretary for House. Read entire letter here.

Under this new FHA policy, you can qualify for an FHA-backed mortgage one year after your bankruptcy, with some limitations and requirements. If you lost your house from a short sale or foreclosure you must use the latest date from which to count the year. For example, if your bankruptcy was discharged on January 3, 2013 but your house was foreclosed upon on May 8, 2013, your one-year waiting period starts on May 8, 2013 and you could get an FHA-backed mortgage on May 9, 2014.

This new policy is a relief to many, but certain requirements must be met to be approved for the year-after-bankruptcy FHA-backed loan. Your bankruptcy or foreclosure must have been caused by an "economic event." This could include job loss, sudden and large medical expenses, decrease in pay, among other reasons. The economic loss must have resulted in at least a six month loss of at least 20% of your usual income. Our bankruptcy attorney, Dean Paolucci, can help define an economic loss.

Another requirement for an FHA-backed mortgage one year after bankruptcy or foreclosure is that you must have had good credit prior to that defined economic event. Before the job loss or divorce (for example) you needed to be current on most or all of your bills. Then, during the 12-month waiting period after bankruptcy or foreclosure, you must not have had any bad credit or late payments.

Finally, if you've met the above requirements to quality for an FHA mortgage, you'll need to take a course with a housing counselor.

An "economic event" did not cause my financial troubles. How long do I have to wait to buy a house after bankruptcy?

The general waiting period is two years. If the bank has foreclosed your home, you're looking at about three years. If you had extreme circumstances (but not necessarily an income loss of 20%) that led you to bankruptcy, then lenders may take that into consideration.

Dean Paolucci, our bankruptcy attorney, can help you determine when you should apply for a mortgage after your bankruptcy. Call us and we can help you figure out the details of your home before, during, and after bankruptcy. You might think you need to move out of your house right away if you receive a foreclosure notice or if you decide to file bankruptcy, but Dean will develop a strategy to use when dealing with foreclosure and your home. He'll outline the best options for your unique situation.

Contact us and tell us your financial situation, bankruptcy can probably help you.

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