Disclaimer: This is written in Utah with Utah state laws, which may differ from other states. Always consult with your agent, lender, and attorney.
Bankruptcy is when a person or business cannot pay their debts and files with the court to repay or discharge them. Filing for Bankruptcy can protect people from garnishments, harassing calls, and/or foreclosure. People filing bankruptcy are called “Debtors.” Lenders and other businesses or people to whom Debtors owe money are called “Creditors.” There are generally two different types of bankruptcy that most people file, and they can add layers to the home purchase process. They are known as chapter 13 and chapter 7.
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Chapter 7 Bankruptcy
Chapter 7 bankruptcy completely wipes out a person’s debts; however, there are a few exceptions, such as student loans. Once the court discharges a chapter 7 bankruptcy, a lender will require a 2 year wait before allowing you to apply for a loan. During that time, it is important to work on increasing your credit score and reducing your debt to income ratio. Also, work on saving up as much as possible for a down payment and closing costs.
It is a good idea to reach out to the lenders that your agent refers you to, well ahead of the 2-year window, preferably 1 year out. This allows for your real estate agent, lender, and you to have a plan set up for purchasing a home when your 2 years are up. If you are a veteran, there are programs available to potentially get you into a home sooner than the 2-year normal requirement. A chapter 7 will stay on your credit report for 10 years. As time goes on after filing for Chapter 7 bankruptcy, the less of an impact it will have on your credit score.
Chapter 13 Bankruptcy
When a Debtor files for a Chapter 13 bankruptcy their attorney typically goes over their budget to see how much money they can afford to pay back to creditors, if any. The Debtor then files a proposed plan to repay a portion of their debts.
These plans range in terms of 3 to 5 years. Sometimes the plan pays back 100% of debts and other times it’s pennies on the dollar. The Court will appoint a Trustee to administer the plan. Sometimes, the Debtor’s attorney negotiates interest rates and/or different amounts to be paid back to creditors with the Trustee or Creditors. Debtors pay a specific amount each month to the Trustee. The Trustee then divides it among the creditors over the 3 to 5 year time frame under the terms of the plan.
Buying a Home after Filing Chapter 13
When it comes to purchasing a home in a chapter 13, there are a lot of extra steps and factors involved. First get in touch with an agent familiar working with bankruptcy attorneys, like the agents on the C4 Elite Real Estate Team here in Utah. The sooner you reach out the better, because it is a longer process than your typical home purchase.
Your agent will know and recommend a few lenders for you to contact to get the loan process started. In a chapter 13 you must have at least 12 months of on time payments to the trustee before a lender will let you apply for a loan. Then they will take a further look at your credit score, debt to income ratio, etc. Most loans and loan programs have a minimum credit score requirement around 600. Bankruptcy filings often initially bring credit scores down. Your lender will know ways you can bring it up over time. Additionally, you may find talk to a credit counseling course that the lenders may recommend. You can also talk to your bank about a secured credit card. You should discuss these options with your attorney before taking any actions.
Once you are under contract on a home the court and trustee will need to approve the new debt (home mortgage). This requires the attorney to get signatures and information from your real estate agent and bank to file a motion with the court for approval. This makes certain you are still be able to afford your bankruptcy payments with the new debt payments. This takes more time than a traditional home purchase, so give yourself plenty of time to move. Your bankruptcy payments could also go up or down depending on your income and expense changes from when you first filed the bankruptcy.
Down Payment and Credit Score After Bankruptcy
Coming up with a down payment may also be tricky with a chapter 13 bankruptcy. It will depend on how much of your income is tied up for the bankruptcy plan payment. You will need to consult with your attorney on how to budget to save each month for a future down payment. Occasionally, there grants and second loans available to help with down payments, or gifts from friends or family. When you are pre-approved for a loan you can go look at homes. If you need to sell your home while in bankruptcy, or if you are facing foreclosure, look for our blog coming up on selling your home after Bankruptcy.
A chapter 13 will be off your credit report in 7 years of the filing date. This could be 2-4 years after you are discharged. Bottom line, you must finish your payments and have no obligations to pay back further debt to the creditors listed in your bankruptcy. If your credit score is just too low right now to purchase, there is a right to purchase (also known as rent-to-own) program called Home Partners of America. The agent you choose will help you determine if it is right for you. There are a lot of rent-to-own programs out there, and not all are created equal.
Do’s and Dont’s of Bankruptcy
- Reach out to an agent on the C4 Elite Real Estate team as soon as you start considering a home purchase. With a consultation we can help you create a personalized plan.
- Consult with your lender and attorney on ways to bring up your credit score.
- Wait to look at homes until you are 100% certain you can qualify for a loan.
- Tell your agent if you have a home to sell, which could change a lot of factors.
- Knowingly falsify any information to your loan officer, be upfront about your bankruptcy. You can still buy your dream home, there is just some more pre-planning needed.
- Purchase a home with-out discussing it with your attorney first.
C4 Elite Real Estate Team Can Help
The agents at C4 Elite Real Estate Team are here to help. We can refer you to lenders and attorneys and we have experienced agents ready to help you navigate the process. Be sure to continue watching our 30 Days to Buying a Home In Utah Blogs for more information.