One of the most difficult decisions for a bankruptcy filer involves surrendering a home. Nobody wants to take this step, but sometimes there is just no choice. Home ownership involves not only a mortgage payment, but it also includes repair expenses, homeowners association dues and utility bills.
Giving up your home will be traumatic – even if you recognize the financial realities. Your family life will be disrupted, the kids may have to change schools, and you will have to sell or store furniture and other personal property that may not fit into a rental.
One of the questions that I get whenever a client has to surrender his home is “when will I be able to qualify for a mortgage so I can buy another house.” Many people are under the misconception that home ownership will be delayed five or ten years or more. The reality is much less harsh.
The answer to the question of when you can again qualify for a mortgage will depend on two factors – one, of course, has to do with your credit worthiness. If you use your bankruptcy to eliminate debt and reduce expenses, you will be in a much better position to manage credit. Obtain a secured credit card, arrange for a loan with a credit union, remain employed and within 6 months to a year after your Chapter 7 discharge, your credit score will bounce back enough to make you a viable borrower.
The second factor has to do with the loan program you choose:
- Conventional loans require a wait of four years from date of Chapter 7 discharge or four years of consistent Chapter 13 payments.
- FHA loans and VA loans require a two year wait from the date of your Chapter 7 discharge or two years of consistent Chapter 13 payments.
- An FHA program called the FHA Back to Work Program (which is set to expire on September 30, 2016) allows a borrower to purchase a primary residence just 12 months after Chapter 7 discharge or 12 months into a Chapter 13 plan, if you can document the economic reasons for your financial hardship.
So, as a practical matter, most bankruptcy debtors who have given up their homes in bankruptcy can be eligible for a new mortgage as early as one to two years after their bankruptcy has been discharged or a year or two into a Chapter 13 repayment plan.
As difficult as it may be to walk away from your home, take comfort in the realization that your return to home ownership will not be unduly delayed.