Buying one’s own home is a goal people in Tucson and across the country strive to achieve. But if someone has overwhelming debt, it may seem like the dream of home ownership will never become a reality. Debt can present obstacles to home ownership in more ways than one. First of all, debt often translates to poor credit, reducing the odds of approval from financial institutions on home mortgage applications. If that person is fortunate enough to be approved for a loan, they may have an unfavorable interest rate that costs them thousands of dollars over the course of their loan. Regardless of approval, interest, late fees, overdraft fees, and other costs associated with debt make it more difficult to keep up with mortgage payments and the other costs of maintaining a home. Therefore, someone with mismanaged debt may benefit from declaring bankruptcy before purchasing a home in Tucson. How long does a debtor have to wait after bankruptcy before becoming eligible for a home loan, and what can debtors planning on buying a home do in the meantime to set themselves up for success? Read on for the answers to these questions and more. To schedule your free consultation with Atlas Bankruptcy Lawyers, call 602-649-4949.
Buying a Home After Chapter 7 Bankruptcy
Chapter 7 bankruptcy liquidates unsecured non-priority debts, and typically takes somewhere between 3 and 6 months to complete. Debtors must fall below a certain income level to qualify, and only assets protected by exemptions will be safe from the bankruptcy trustee’s grasp. Because chapter 7 bankruptcy wipes out financial obligations, it can be viewed less favorably by financial institutions during future credit applications than chapter 13 bankruptcy. Chapter 7 debtors generally have longer waiting periods to purchase a home after bankruptcy for this reason.
Chapter 7 bankruptcy remains on a debtor’s credit report for 10 years. The debtor doesn’t have to wait that long to qualify for a home loan. There are different waiting periods for different types of home loans after chapter 7 bankruptcy. FHA and VA loans have the shortest waiting period- only 2 years following chapter 7 bankruptcy. USDA loans require a longer waiting period of 3 years, and conventional home loans have a minimum waiting period of 4 years, although lenders can set their own stricter limitations on bankruptcy debtors. The waiting periods to refinance a mortgage after chapter 7 bankruptcy are the same, although the waiting period for a conventional home mortgage can be reduced to 2 years if the debtor demonstrates extenuating circumstances justifying this decision.
Buying a Home After Chapter 13 Bankruptcy
Chapter 13 bankruptcy doesn’t simply wipe away debts like chapter 7 bankruptcy. Debtors have to repay debts in order of certain categories when they declare chapter 13 bankruptcy. First are fees related to the bankruptcy. Next, secured debts are paid. Priority debts are the third category of debts paid in chapter 13 bankruptcy. Only these three categories of debt need to be paid in full for the debtor’s case to be discharged. Unsecured non-priority claims can be cleared if the debtor has otherwise paid their disposable monthly income into the plan, which lasts either 3 or 5 years.
Chapter 13 bankruptcy remains on a debtor’s credit report for 7 years. Because a debtor repays their most important obligations in chapter 13 bankruptcy, both how long it remains on the debtor’s credit report and how long before the debtor can buy a home are shorter. However, the waiting periods can be longer if the chapter 13 case ends through dismissal as opposed to discharge. For a successfully discharged case, the waiting period for an FHA, VA, or USDA loan can be as little as one year. A conventional loan will have a waiting period of 2 years for a debtor after chapter 13 bankruptcy. To refinance a conventional loan, a chapter 13 debtor must wait 2 years if the case is discharged, and 4 years if the case is dismissed. A VA loan can be refinanced 1 year after discharge, and FHA and USDA loans can be refinanced during an active bankruptcy case if the debtor can provide proof of one year of timely payments.
Extenuating Circumstances
Sometimes, the waiting periods after bankruptcy can be shortened if the debtor is able to prove extenuating circumstances that led to the bankruptcy filing. This term can be subjective, and different agencies and lenders can use their own practices when determining if extenuating circumstances are present. The FHA loan considers any event that reduces a debtor’s income by 20% for 6 or more months to be an extenuating circumstance. At the USDA, the event must be outside of the debtor’s control and unlikely to happen again. The VA loans consider events like excessive medical bills or extended unemployment- but not divorce- as extenuating circumstances. Conventional lenders can set their own guidelines, but may consider events like job loss, unemployment, medical expenses, divorce, etc.
If you wish to purchase a home after your bankruptcy discharge, it’s important to gather as much evidence as you can demonstrating the extenuating circumstances leading to your bankruptcy filing. If possible, you should also collect documentation showing what you’ve done to address the issue and prevent it from happening again. Work with your attorney now, and it will save you time and effort in the future when you apply for a home mortgage. Discuss your situation with one of our Tucson bankruptcy lawyers today, free, at 602-649-4949 for more information.
Can a Home Mortgage Be Discharged in Bankruptcy?
Arizona bankruptcy law is known for discharging debt, and a home mortgage is the largest debt that many people have. However, home mortgages, for the most part, are non-dischargeable in bankruptcy. One exception here is if the debtor has more than one home mortgage, owes more on the home than its value, and files for chapter 13 bankruptcy instead of chapter 7 bankruptcy. This process is known as “lien stripping.” Here, if the debtor has a second or third mortgage on their home, this will be converted into unsecured debt, while the primary mortgage will remain secured debt. A debtor only pays unsecured debts to the extent that their disposable monthly income allows in chapter 13 bankruptcy.
Want To Address Debts Without Interfering With Goals Of Buying a Home? Discuss Bankruptcy With An Experienced Professional Today.
Buying a home is expensive, but so is living with the risk of rent increases at the end of each lease. Significant debt doesn’t necessarily have to be a barrier to purchasing a home in Tucson. But it may be more beneficial for a debtor to begin the home-buying process after discharging their debts in bankruptcy. An experienced legal professional in Arizona can help you determine if, and when, you should file for bankruptcy if you have dreams of owning your own home. Make sure you’re eligible and see how long you would have to wait to obtain or refinance a home loan. Your initial consultation is free, and you may qualify to file using our post-filing payment plan option. Learn more with your free consultation at 602-649-4949.
