In a word, yes. In fact, many people can buy houses before a judge discharges their bankruptcies. When someone asks can I buy a house after filing bankruptcy, they should know some of the biggest factors: obtaining a loan and waiting through the two-year waiting period. To better answer this question, we’ll look at how bankruptcy affects some key decisions you make during the home-buying process.

Many people are asking this question in light of the recent bankruptcy filing increase and the home mortgage interest rate decrease. Coronavirus is largely responsible for both these developments.  The virus, and especially its lockdowns, laid additional economic and emotional stress on families. Unemployment, divorce, and illness, any of which can be a bankruptcy trigger, all increased. COVID-19 also decreased housing demand. Whenever demand goes down, prices usually go down as well.

As a result, many families are caught between. The aforementioned personal financial difficulties have them thinking about bankruptcy, and the aforementioned near-record-low interest rates have them thinking about buying a home. 

A Georgia bankruptcy lawyer can help families do both these things. As outlined below, an attorney unlocks all the benefits of bankruptcy. And, even though it might seem impossible to borrow hundreds of thousands of dollars and make the purchase of a lifetime in the wake of a bankruptcy filing, a Georgia bankruptcy lawyer can make that happen.

 

The Benefits of Filing Bankruptcy in GA

The Automatic Stay, asset exemption, and debt relief are the three major pillars of a consumer bankruptcy in Georgia.

Section 362 of the Bankruptcy Code immediately stops adverse creditor actions, like foreclosure, wage garnishment, repossession, and collections lawsuits. Typically, the Automatic Stay remains in full effect until the judge closes the case. As a result, debtors get the time they need to pay off past-due obligations on their own terms. More on that below.

“If I file bankruptcy I lose everything” is probably the number one bankruptcy myth. At worst, bankruptcy debtors only lose their nonexempt assets. Most people do not have nonexempt assets. The protected list includes:

• House,
• Retirement account,
• Current wages,
• Personal property,
• Government benefits, and
• Motor vehicle.

Those are just the formal exemptions. A Georgia bankruptcy lawyer can apply some informal exemptions and protect even more property.

The best interest of creditors rule is a good example. A trustee (person who manages the case for the judge) can only liquidate nonexempt property if that liquidation is in the creditors’ best interest.

Assume Cole has a boat the formal exemptions don’t shield. It’s worth about $1,000. The trustee estimates that sales costs, such as storage fees, repairs, and auction fees, would be about $1,000. The trustee cannot touch Cole’s boat. Liquidation would net nothing for creditors, so that action isn’t in their best interests.

Finally, let’s talk about debt relief. Most debtors may choose between discharge (forgiveness) or repayment.

If unsecured debts are a problem, many families choose Chapter 7. This form of bankruptcy quickly eliminates most unsecured debts, such as:

• Payday loans,
• Revolving credit accounts,
• Signature loans,
• Medical bills, and
• Credit cards.

Some unsecured debts, mostly past-due income taxes and student loans, are only dischargeable in some situations.

Families struggling with delinquent secured debts, like past-due car payments, usually choose Chapter 13. The aforementioned Automatic Stay remains in effect for up to five years in a Chapter 13. During this time, the debtor makes an income-based debt consolidation payment every month which slowly erases that delinquency. 

 

How Bankruptcy Can Affect the Home-Buying Process in Georgia

 

When you’re asking can I buy a house after filing bankruptcy, it’s helpful to understand the process you will need to complete. This process is unique for every family and every home-buying experience. Bankruptcy varies in different situations as well. In general, however, here’s how these two things interact at some key points.

 

Deciding to Buy a House After Filing Bankruptcy

Pretty much every other item on this list is a purely financial concern. This item is partly financial and partly emotional. 

Financially, most mortgage banks want to see at least two years of stable employment. A little job-hopping might be okay, especially if you did not change professions (e.g. a nurse went to work for a different hospital). Self-employed people might need more than two years, since this income is usually unstable. Filing bankruptcy doesn’t affect this factor. However, many people lose their jobs and are forced into bankruptcy.

Next, your DTI (Debt to Income) Ratio must usually be better than 50 percent. If you earn $6,000 a month and your regular monthly bills, such as rent and car payment, are $2,000, your DTI is 33 percent. Chapter 13 often affects your DTI. The monthly debt consolidation payment amount varies, but it’s usually about the size of a rent or mortgage payment.

Finally, your credit score must be above 620, at least in most cases. If it’s above 720, you normally qualify for the best possible loan terms. Typically, people who file bankruptcy already have damaged credit. Repeated late payments and other negative information quickly reduce your score. A bankruptcy filing normally lowers it by about another 140 points. 

People who file for bankruptcy start with a poor credit score because of the delinquencies in their credit history. After a Chapter 7 bankruptcy, the average credit score ends up being in the low 400s to the mid-500s. That’s after the drop of the average of 140 points.

As for emotional readiness, home buyers should be ready to live in one place for at least four or five years. Home buyers must also be willing to assume more responsibility. If something breaks, calling the landlord to fix it is not an option. Filing bankruptcy is a very topsy-turvy time for most people. However, as the weeks and months pass, these effects lessen dramatically.

 

How to Improve Your Chances of Buying A House After Bankruptcy

Before applying for a mortgage, you should be prepared to show lenders that you are more responsible financially. Part of that is showing them that you have changed habits by establishing good habits to indicate you will make your mortgage payments reliably.

You need to rebuild your credit and demonstrate good credit habits. Ensure that you aren’t using credit too extensively. Here are some tips for rebuilding your credit more quickly.

• Pay every bill on time and completely. Even utility bills can be reported to credit bureaus for non-payment, so it’s important to take control of your bills and pay them in a timely manner.
• Routinely check your credit score and your three credit reports (you get free reports from each reporting bureau) and dispute any inaccuracies. Even creditors occasionally make mistakes, and credit bureaus report what is reported to them.
• Refrain from applying for unsecured debt like credit cards or personal loans. These usually come with high interest rates. Unsecured debt can quickly get out of control if you aren’t careful. If you are just coming out of bankruptcy, it’s best to avoid any unsecured debt lest you fall back into bad credit habits.
• Apply for and obtain a secured line of credit. A secured credit card that is backed by a deposit you’ve paid and reports on-time payments to the credit bureaus is a good option. Some banks offered secured credit rebuilder loans as well.

A co-signer is someone who is willing to help ensure that you pay the debt. If you have a friend or relative with excellent credit who is willing to co-sign with you on new credit lines, that can be beneficial to you. Sometimes, a bank will look more favorably on borrowers who have someone willing to vouch for your willingness and ability to pay.

There are some risks to having a co-signer. The co-signer agrees to be responsible for your debt if you don’t pay. Not to mention, if you default, both of your credits will be affected.

A bankruptcy can remain a red flag on your credit report long after it was dismissed or discharged. Writing a letter to potential lenders to explain the circumstances leading up to your bankruptcy will give them details the numbers on your credit report don’t explain. Be sure to include details about the changes you’ve made since bankruptcy to better your financial life. They will want to know how you anticipate staying out of bankruptcy in the future.

You aren’t required to write a letter of explanation to your potential lenders, but doing so helps them to see the bigger picture of what led to the decision to file bankruptcy. If you choose to write a letter of explanation, you should include it with your mortgage application. You should submit the application in such a way as to request a preapproval.

 

Calculating Your Monthly Expenses After a Georgia Bankruptcy

Most families live from month to month, or even from paycheck to paycheck. Therefore, the monthly payment might be the biggest factor in a home-buying decision. “Can I buy a house after filing bankruptcy” doesn’t just apply to past financial issues, but also your current financial situation.

The 1 percent rule usually applies to the payment itself. A monthly PIE (principal, interest, and escrow) payment is usually about 1 percent of the purchase price. The house note for a $200,000 home will be about $2,000 per month. This is only a rule of thumb. A number of factors, which are examined below, could make your payment substantially lower or higher.

You’ll also need to set aside money for repairs and maintenance. One-tenth of 1 percent ($200 in this example) a month is usually a good starting point. You should anticipate higher maintenance costs if the house is older.

If the PIE payment/repair budget combination is substantially more than you are paying now, the bankruptcy trustee will demand to know where this money is coming from. If you do not have a good explanation, such as a recently-acquired second job, the trustee might think you concealed income when you filed your petition. Your Georgia bankruptcy lawyer might have to deal with bankruptcy fraud charges.

 

Saving for a Down Payment and Closing Costs After a Bankruptcy in GA

Ideally, you should pay about 20 percent down. That amount substantially reduces your monthly payment. Large down payments decrease loan risk and thus lower the interest rate. If you’ve already paid a lot, you’re more likely to keep paying. Furthermore, if you put 20 percent down, most lenders waive the PMI (Private Mortgage Insurance) requirement. That waiver reduces your down payment even further.

Saving big money is often a problem for families, especially in a Chapter 13. Usually, all disposable income goes to the debt consolidation payment. Furthermore, if you’ve already saved some money for a down payment, protecting it might be a problem. Cash in a savings account is usually not exempt and normally not subject to the best interests of creditors rule. The money is there, so the trustee simply needs to take it.

The good news is that a large down payment is usually an option. Many lenders require less than a 5 percent down payment. Some lenders, such as VA lenders, require no down payment.

Paying closing costs could be an issue as well. Appraisal fees, title insurance, and other costs are usually about 5 percent of the loan value. But the buyer usually doesn’t pay all these costs. Your real estate agent, or your Georgia bankruptcy lawyer, can negotiate who pays what.

 

Obtaining Mortgage Pre-Approval After a Bankruptcy in Georgia

Several kinds of mortgage loans are available, largely depending on your financial circumstances. Anyone with a decent credit score, even someone who filed bankruptcy in the recent past, can qualify for a loan. The possibilities are:

• Conventional Loan: Freddie Mac or Fannie Mae backs these loans. A conventional loan is, well, conventional. The credit score and down payment requirements are pretty much down the middle.
• FHA: The Federal Housing Administration backs these loans, so the credit score and down payment requirements usually aren’t as strict. The trade-off is that the interest rate is usually higher.
• VA/USDA: These loans usually have the best possible terms. Veterans Administration loans are available to, wait for it, military veterans. U.S. Department of Agriculture loans are available to some rural homebuyers who meet certain income requirements. 

If you buy a house after filing bankruptcy, this step is usually the trickiest one. The credit score issue, which was discussed above, is one possible dilemma. The mortgage waiting period is a more significant dilemma. This waiting period varies in different situations, mostly depending on the type of bankruptcy. But it’s usually about two years. 

In general, after about a year of work, most people have credit scores which are high enough to qualify for a good loan. But they may still have to wait.

Now for the good news. The two year clock begins ticking when the debtor files, not when the case is closed. Furthermore, this waiting period is usually not a legal requirement. It’s more of a bank policy. As such, the amount of time is negotiable, and a Georgia bankruptcy lawyer is a very good negotiator. 

Typically, mortgage banks want to make mortgage loans. That’s how they stay in business. Therefore, just keep swimming if one bank won’t work with you because of your recent bankruptcy filing. There’s a good chance that the bank will be more accommodating across the street.

 

Which Loan Is Right For You After Bankruptcy?

Each type of loan has different criteria for applying after you’ve filed bankruptcy. Knowing the differences between them can help you determine which kind of loan you should prepare to apply for. Let’s look at the criteria for applying for the different loans.

 

FHA Loans

There are different criteria for FHA loans depending on whether you filed Chapter 7 or Chapter 13 bankruptcy. You must wait until at least two years have passed after you filed for a Chapter 7 bankruptcy. If you filed for Chapter 13 bankruptcy, you must have made at least one year’s payments on your repayment plan, and they must have all been on time. The lender must agree to approve your loan, but the bankruptcy court has to agree to allow you to have more debt before your credit returns to a place of good standing.

 

Conventional Loans

There are three organizations that facilitate conventional loans: Ginnie Mae, Fannie Mae, and Freddie Mac. Ginnie Mae is the government-owned loans like USDA, VA, or FHA loans. Fannie Mae and Freddie Mac are private loans or loans insured by the government, requiring mortgage insurance.

A lender will not approve a Freddie Mac or Fannie Mae loan if you’ve filed Chapter 7 bankruptcy within the last four years or filed Chapter 13 and gotten a discharge in the past two years. If your Chapter 13 bankruptcy was dismissed within the previous four years. Banks can choose to use less strict or more strict rules depending on the bank’s corporate practices.

 

House-Hunting After Filing Bankruptcy in Georgia

Most people have a housing wish list. They look for a house in a certain area that has certain features, like a certain square footage, and is within their budget. We’ve talked about how bankruptcy affects your budget and your shopping choices. Now, we need to talk about house-hunting while you are in bankruptcy. 

As mentioned, the credit score impact is often negligible and the waiting period usually expires before a Chapter 13 ends. Therefore, many people can buy a house after they file bankruptcy and before they exit bankruptcy.

Your Georgia bankruptcy lawyer is a big part of the house-hunting process in this situation. Once you zero in on a home, your attorney must file a motion to acquire additional debt.

Most judges grant these motions if the trustee is on board, even if a creditor objects. The proposed purchase must be necessary, reasonable, and manageable to get the trustee’s approval.

House purchases are necessary if the debtor needs a bigger place to live, a safer area, or anything like that. As for reasonableness, your chances of buying Wayne Manor while you are in bankruptcy are practically zero. Anything less is probably in play. Most importantly, the house payment cannot compromise your ability to make the monthly debt consolidation payment.

 

Ask an Athens Bankruptcy Lawyer in Georgia About Buying a House After Bankruptcy

Are you wondering, Can I buy a house after filing bankruptcy? If the conditions are right, you can buy a house. For a free consultation with an experienced Georgia bankruptcy lawyer, contact Morgan & Morgan, Attorneys at Law, P.C. We routinely handle matters in Clarke County and nearby jurisdictions.

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