Buying a home after bankruptcy: Is it possible?

Ginger Dean

October 27, 2014

By: Ginger Dean, Home Finance Specialist

In: Finance and Legal

Filing bankruptcy is a difficult process - both emotionally and financially. All told the toll is a dizzying burden to manage as one must comb through their finances with a fine tooth comb and recall all the now cringe-worthy purchases which put them in this position in the first place. Feelings of guilt, loss, and regret often flood your mind because you're now wondering how to pick up the pieces and move forward.

Will you be able to buy a new home? What about securing a credit card? Does bankruptcy mean that you'll have a scarlet A on your credit report for the rest of your financial life?

For 7-10 years, yes, but not for the rest of your life. However, the process of rebuilding after bankruptcy starts once the ink has dried on your legal paperwork.

Can you get a credit card? Sure. It may just be a secured card or a credit card with an egregious interest rate.

Can you buy a home? Yes. But with some limitations, especially when using a FHA loan. Though keep in mind that borrowers aren't eligible for a new FHA loan for two years after a bankruptcy.

However, Uncle Sam wants to make it easier to get a new mortgage if and only if you encountered hard times that were truly outside of your control.

According to the LA Times:

To qualify for the break, borrowers must show that their foreclosure or bankruptcy was caused by external economic factors, reducing their income by 20% or more for six months. And no, you can't have quit your job or have been fired for cause.

Those who can demonstrate such a pay cut, job loss or decline in business income now must spend only one year making timely rent and credit-card payments before they can apply to buy a home with an FHA-insured loan, a recent FHA bulletin explained. In addition, they must obtain housing counseling from an agency approved by the Department of Housing and Urban Development.

The goal is to distinguish between the truly irresponsible and those who found themselves in financial situations that were out of their control, despite the best of actions and intentions.

For example, if you maxed out all 10 of your credit cards after going on a few shopping binges and vacations then this new break would not allow you to secure the FHA loan. If, however, you burned through your 15 month emergency fund after losing your job due to no fault of your own then you're in luck.

This also creates jobs and increases economic activity in the real estate sector - the sector responsible for the boom and eventual bust back in 2008. As you can see, the goal is not to reward the irresponsible, but to give another chance to help those hurt by the market crash of 2008 and help them get back on their feet and secure a slice of the American Dream.

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