Buying a Home After Bankruptcy
Sometimes a young couple who has struggled for years will finally decide to file bankruptcy. For a young family the financial difficulty is often a combination of unstable income, medical bills and overextended credit. While desperate to buy their first home, they have resigned themselves to the belief that the bankruptcy will prevent home ownership for the foreseeable future.
Not so.
Most debtors emerge from bankruptcy financially stronger and determined to not repeat past mistakes. Many debtors who receive bankruptcy discharges have steady jobs, no unsecured debt, and low debt-to-income ratios. Additionally, a bankruptcy debtor cannot receive a second discharge for several years. That actually sounds like a good credit risk combination, right?
The federal government recognizes that a person who has recently discharged unsecured debt through bankruptcy has little debt, but must demonstrate a commitment to managing credit in a responsible manner. That is why the FHA credit guidelines require the debtor to show two years of responsible credit management after the bankruptcy discharge before it will issue a federal guarantee on a home loan. It is also possible to obtain a federal guarantee after twelve months, if the debtor can show that the bankruptcy was caused by extenuating circumstances beyond his or her control. An FHA guarantee means that the lender is guaranteed money if the borrower defaults on the loan. This federal guarantee makes your loan application more appealing to banks and other lenders.
Rebuilding your credit report and safeguarding your credit score is very important if you want to buy a house after bankruptcy. Your bankruptcy attorney can provide helpful tips regarding the rebuilding process and help you on the path to home ownership.
Surrendering A Home In Bankruptcy: What Is Your Responsibility Until The House Sells?
Our office often gets questions from clients about what responsibilities they have, if any, when they are surrendering their home in a bankruptcy. The simple answer is this: until the house is sold at a foreclosure sale, you own it and are responsible for the upkeep of the home.
These days, most mortgage companies and banks are in no hurry to have you move out of the home you are surrendering. There are always exceptions. However, the majority of mortgage companies would rather the house be occupied and taken care of than for it to sit empty and deteriorate or be vandalized. Many of our clients opt to stay in the home up until a week or so before the sale date in order to save money on rent. However, whether your intent is to stay until the sale or move out sooner, you need to continue to take care of the home as its owner. That means you continue to cut the grass, pay the utilities, pay your homeowner’s insurance, etc. In other words, you treat the real estate like you did before you filed bankruptcy and decided to give up the property. The difference is that you will no longer make mortgage payments.
There are exceptions where clients make arrangements with a mortgage company to turn over the keys and the mortgage company agrees to take possession of the property before the sale. If you can work out such an agreement, get it in writing!!! You want to make sure that the mortgage company will be paying the insurance and taking care of maintenance before you cancel your insurance policy, turn off utilities or stop cutting the grass.
DO NOT take light fixtures, appliances that came with the home, plumbing fixtures or any other item that is attached to the real estate. Also, avoid causing damage to the house when moving. You want to walk away as cleanly as possible to avoid issues that may be non-dischargable in the bankruptcy. If you have questions, you can always call us for advice!