Buying A House After Filing Bankruptcy

by Douglas Jacobs, Esq.

February 22, 2009

330562906_deb1752971_mWhen can I buy a house after filing bankruptcy? As a bankruptcy attorney, many of my clients are concerned that once they file bankruptcy they wont be able to buy a house. Or at least they wont be able to do so for the ten years a Chapter 7 bankruptcy stays on their credit report.

Truth is that many lenders shy away from lending money to people who have recently sought the protection of bankruptcy. But that actually doesn’t last very long. My clients find that after a year to a year and a half, the credit industry is back knocking at their doors with credit card offers, home loan offers, etc.

Recently, a client called 3 months after the bankruptcy filing and before her case was even closed, wanting to know if there was any reason she shouldnt accept the credit card offer she had just received!

Mortgage lenders generally look at three things to determine legibility to get a home loan: FICO score, regular income level, and the percentage of the purchase price you are able to put down. After filing bankruptcy, your FICO score will take a dip. Often that is caused by late payments more than the actual bankruptcy filing. Generally, with no overdue payments anymore, the FICO score comes back pretty quickly  a year or so.

The regular income level is based on your job and how long youve had it. Its easier to get a loan if youve been working in one place for a while on a steady income. The loan committee used to also take a close look at the amount your payments on the house will be in relation to your total income.

Thus, it used to be that you couldn’t get a loan if more than 30% of your income was going to go to the house payment. (Relaxing that standard so loans were given out based on 50 or even 60% on ones income level was one of the contributing factors to the mortgage crisis we are currently facing.)

Finally, the amount you can put down towards the purchase of the house makes a big difference. The higher the percentage of down payment, the more protection for the bank. (Allowing minimal or no down payments and relying on appreciation were also factors that led to our current mortgage crisis.)

So, what does this mean? If you want to buy a house after filing bankruptcy, you can. If may be you will need to wait a year or two until your income and expenses stabilize and until you can sock a few dollars away for a down payment, but thats probably a sound economic policy anyway.

 

 

image courtesy of:  Brewbooks

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.

Last modified: December 11, 2013