It is possible to buy a house after bankruptcy. However, the question remains how long one must wait after a bankruptcy is filed to apply for a mortgage.
First, in Michigan, it is always possible to purchase a new home through a private land contract agreement with a seller. There is no waiting period after bankruptcy.
This form of “rent to own” home buying is more widely utilized here than in many other states.
A land contract agreement does not require a mortgage, mortgage underwriting, or the approval of a bank or lender—unless you are borrowing funds for a down payment, perhaps.
A land contract is between you and the seller.
This article does not discuss land contract arrangements in greater detail than this, but it is true that, if you can find someone to sell you a house on land contract, you can buy a house after bankruptcy. (However, beware of predatory land contracts and do your homework as to taxes and utilities owed on the home before signing!)
The purpose of this article, otherwise, is to discuss the traditional home-buying method: the mortgage loan.
Can you get mortgage after bankruptcy?
It depends on the type of bankruptcy you filed, how many bankruptcies you’ve filed, what sort of mortgage you are applying for—and what steps you take to repair your credit after your bankruptcy.
Mortgage Lending after Chapter 7 Bankruptcy
After “significant derogatory credit events,” mortgage underwriters such as Fannie Mae and Freddie Mac enforce required waiting periods prior to underwriting a mortgage.
It is the view of these underwriters that such events as a bankruptcy indicate that there is a higher likelihood of a later default on the mortgage loan.
However, their underwriting guidelines do account for the possibility that the bankruptcy filing may be due to extenuating circumstances that have nothing to do with financial responsibility.
An example might be a major health event of a one-time nature, such as recovery from an automobile accident.
After a Chapter 7 bankruptcy, the required waiting period for a conventional mortgage is 4 years from the date of discharge or case dismissal.
With documented extenuating circumstances, this can be reduced to 2 years from the date of discharge or dismissal.
How about non-conventional mortgages?
A government-backed loan such as a VA or FHA loan carries a waiting period of only 2 years from the date of Chapter 7 discharge or dismissal even without extenuating circumstances.
Mortgage Lending after Chapter 13 Bankruptcy
A Chapter 7 bankruptcy process in Michigan is generally completed 4 months after the date of filing of the case.
A Chapter 13 bankruptcy, on the other hand, may take 3-5 years from the date of filing to be completed.
While this lengthy process may seem like an eternal slog when you are considering filing for a Chapter 13 bankruptcy, the good news from the mortgage underwriting standpoint is that the length of time you spend in the Chapter 13 is accounted for in the post-bankruptcy waiting period.
With a Chapter 13 bankruptcy, the waiting period will differ depending upon whether your Chapter 13 reached successful discharge or whether it was dismissed.
If your Chapter 13 was successfully discharged (3-5 years after filing), the Fannie Mae and Freddie Mac underwriting guidelines account for the length of time spend in the bankruptcy process.
In that case, you are able to apply for a new conventional mortgage 2 years from the date of discharge.
If your Chapter 13 was dismissed, on the other hand, the waiting period is 4 years from the date of dismissal of the bankruptcy case.
Extenuating circumstances will reduce this latter waiting period, again, to 2 years.
A VA or FHA loan may be pursued only 1 year after a Chapter 13 bankruptcy is discharged.
Bankruptcy Followed by Foreclosure
When you surrender a house in Chapter 7 or Chapter 13 bankruptcy, it does not automatically convey the deed to the home back to the mortgage lender.
It does not allow you to avoid a foreclosure.
A bankruptcy discharges your personal obligation to make any further mortgage payments related to the surrendered property, but the mortgage holder still has rights to the property itself.
The mortgage contract you signed (as opposed to the mortgage note obligating you to make monthly mortgage installment payments) secured the house as collateral guaranteeing your payment of the mortgage note obligation.
Your Chapter 7 or Chapter 13 bankruptcy discharges your obligation to perform as required by the mortgage note—but it does not affect the mortgage agreement itself.
In Michigan, when a home buyer is in default of the mortgage note agreement (and a failure to make payments is, of course, a default), the mortgage holder must foreclose on the home to obtain title.
A bankruptcy discharge does not change this.
Thus, after surrendering a home in Chapter 7 or Chapter 13 bankruptcy, there will still be a foreclosure of the home.
That is the legal means by which, other than sale or quit-claim or deed-in-lieu of foreclosure, a home passes title in Michigan.
Therefore, if, in your Chapter 7 or Chapter 13 bankruptcy proceeding, you surrendered a parcel of real estate, you will have both a bankruptcy and a foreclosure on the same mortgage in your credit history when you apply for a new mortgage afterward.
The standard waiting period for a new mortgage after foreclosure is 7 years.
With extenuating circumstances, this can be reduced to 3 years.
The bankruptcy waiting periods may be applied instead, if the buyer can provide documentation proving that the mortgage debt was discharged in a bankruptcy.
Thus, bankruptcy attorneys regularly receive phone-calls from former clients requesting this paperwork. (Which has nearly always already been provided: keep everything your bankruptcy lawyer sends you!)
Multiple Bankruptcy Filings
If, however, you have filed for more than 1 bankruptcy within the prior 7 years, the waiting period for a new mortgage will be 5 years.
This will nearly always be the case where a prior bankruptcy was dismissed and then re-filed. If the second bankruptcy is a 5-year Chapter 13, this issue may be avoided.
A dismissed bankruptcy followed by a 4-month Chapter 7, on the other hand, may present this difficulty.
Extenuating circumstances that are well-documented may reduce this waiting period to 3 years from the date of most recent bankruptcy discharge or dismissal.
A Note—or Warning—About Short Sales
Many a Michigan homeowner underwater on a mortgage has been talked into a short sale by a commission-hungry realtor on the basis that it will “look better on your credit than bankruptcy.”
A short sale, or pre-foreclosure sale as Fannie Mae calls them, carries the exact same post-event mortgage underwriting waiting period as a Chapter 7 bankruptcy.
That is, after a short sale, you will wait 4 years for a new mortgage or 2 years with extenuating circumstances.
What does the short sale buy you, then?
Unless the mortgage obligation was your one and only debt, it bought you months and months of back and forth between yourself, your realtor, your mortgage servicer, attorneys, loads of form-filling and paperwork, and the soul-tearing joylessness that only an extended negotiation with a non-human corporate entity that holds all of the cards legally can bring.
And all of that with only a small chance of success—if success is defined as an agreement that you be allowed to sell a house for less than is owed and not have to pay a lump sum of some sort (typically well into the 4- or 5-figure range).
While you’re at it, don’t forget the tax obligation: you’ll also, with a short sale, receive a 1099 for the charge-off of the unpaid balance “written off” on the mortgage balance. This means that your income for tax purposes will be increased that year by whatever number appears on that 1099.
That doesn’t happen when a home is discharged in bankruptcy.
Caveat emptor. Even when the realtor is your cousin’s sister-in-law.
Buying a House after Bankruptcy: The Bottom Line
The bottom line is that homeownership is certainly possible after bankruptcy and within a predictable timeframe.
You will need to take some steps during the waiting periods described above to repair your credit legitimately. (That is, avoid “credit repair” scammers claiming to be able to make a bankruptcy filing disappear from your credit report.)
You will need to ensure that no further negative credit events occur within that waiting time period.
You will need to take the proper steps to document any extenuating circumstances behind your decision to file for Chapter 7 or Chapter 13 bankruptcy.
You will need to retain all of the documentation provided to you by your bankruptcy attorney during and at the end of your bankruptcy process.
With careful planning, proper organization of your paperwork, home ownership can be achieved again after bankruptcy.
Attorney Walter Metzen is a Board Certified Bankruptcy expert and has assisted thousands of consumers with Chapter 7 and Chapter 13 bankruptcies.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process and is experienced in determining and advising as to the best course of action when filing Chapter 7 or Chapter 13.
Contact us now to schedule your free bankruptcy consultation. 313-962-4656