Options for Financing a Home a Year After a Bankruptcy Discharge

Obtaining financing for a home often proves difficult for people who have previously filed bankruptcy. The underwriting process for a mortgage usually begins when your lender checks your credit. Bankruptcies lead to low credit scores and people with low credit scores are viewed as high risk borrowers. If you filed bankruptcy within the last year, then lending options are few and far between. However, some lenders do finance loans for people who recently declared bankruptcy.

Under federal bankruptcy laws, individuals can normally file either chapter 7 or chapter 13 bankruptcy. When you file chapter 7 bankruptcy and you have sufficient assets, you must liquidate your assets and the sale proceeds are divided among your creditors. When you file chapter 13 bankruptcy, you enter into an agreement with your creditors under which you must repay your debts over a period of between three and five years. Both types of bankruptcy negatively impact your credit and appear on your credit report for up to 10 years. However, you can more easily obtain financing if you file chapter 13 bankruptcy as opposed to chapter seven.

Most mortgages are classified as conforming loans, which means the loans conform to underwriting standards imposed by government sponsored entities known as Fannie Mae and Freddie Mac. These entities buy the majority of mortgages written in the United States. You cannot qualify for a conforming loan until four years after the court discharges your chapter 7 bankruptcy, whereas you can qualify for a conforming loan just two years after a court discharges a chapter 13 bankruptcy filing. Therefore, you cannot qualify for a conforming mortgage if you filed bankruptcy just 12 months ago.

The Federal Housing Administration (FHA) does not buy or finance mortgages. However, the FHA does insure loans that lenders write and this insurance protects lenders against losses caused by borrower defaults. Generally, you cannot obtain an FHA insured loan until two years after the discharge of your chapter 7 bankruptcy filing. However, if some kind of extenuating circumstances lead to your filing, the FHA might insure a loan for you within just 12 months of your filing. You can obtain an FHA insured loan just 12 months after having a chapter 13 bankruptcy discharged. However, despite FHA insurance, lenders may or may not decide to write you a loan, because lenders can impose underwriting guidelines with stricter rules than those imposed by the FHA.

If you cannot qualify for an FHA loan, you can attempt to obtain a loan from a sub-prime lender. These lenders offer loans to people with poor credit. Due to the risks involved, sub-prime lenders charge high interest rates and these loans often involve large prepayment penalties and upfront costs. You can also try to obtain a privately held mortgage. These loans often take the form of owner-financing. The seller of a home holds the note until you pay off the debt, and in most instances, private sellers do not check your credit report. If you take out a private mortgage, ask a contract attorney to review the document before you sign it to ensure that you understand the terms of the deal.

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