Buy a Home After Filing Chapter 13 BankruptcyIs it Possible to Rent or Buy a Home After Filing Chapter 13 Bankruptcy? Most people in California will encounter financial difficulties at some point in their lives, including job losses, periods of unemployment, or serious illnesses that cause their levels of debt to swell to unmanageable levels. When people are unable to repay their debt, they might consider filing for Chapter 13 bankruptcy to allow them to restructure their debts through a repayment plan lasting from three to five years.

Chapter 13 bankruptcy is a different type of personal bankruptcy than Chapter 7 and does not involve the liquidation of assets. However, a bankruptcy trustee will oversee the repayment plan and must approve any plan to take on new debt during the repayment period. In some cases, a person who is in a Chapter 13 repayment plan might undergo circumstances that lead him or her to want to rent or purchase a new home. Here is some information about the factors that might influence whether or not you can rent or buy a home during Chapter 13 bankruptcy.

Factors considered by prospective landlords

Landlords consider several factors when deciding whether or not to accept an application for a rental apartment or home, including the following:

  • The applicant’s available income
  • The applicant’s employment history
  • Status of the bankruptcy case
  • When the bankruptcy was filed
  • Your credit history

In Chapter 13 bankruptcy, you cannot take on any new debt, including a lease, without first getting written approval from the trustee or the bankruptcy court judge. If you want to incur new debt, you will need to first ask for permission to avoid jeopardizing your Chapter 13 bankruptcy case. Once you have approval, you can then enter into a lease to rent a home.

Many landlords understand that people who go through bankruptcy will not be able to discharge new debts for several years after they receive their discharges and might not especially consider your being in bankruptcy a bad thing. A prospective landlord may be more likely to want to make sure that you have enough money to pay your rent in addition to your payments to the bankruptcy trustee. To demonstrate that you are a reliable tenant, you might want to show several years of receipts showing that you have paid your current rent on time.

The stability of your job will also be important. To be approved for Chapter 13 bankruptcy, you also had to demonstrate that you had enough income to make your plan payments. A landlord will similarly be interested in seeing that you have stable employment and might look at how long you have worked at the same job, your past employment history, and your pay rate. You will want to show a prospective landlord that you have sufficient discretionary income from your employment to pay rent as well as your Chapter 13 plan payments.

Some landlords are hesitant to rent to tenants who are currently in a Chapter 13 repayment plan. If you have to take time to get the lease approved by the bankruptcy court, the prospective landlord might not want to wait.

The filing date of your bankruptcy case will also be important. The more time that has passed since you filed your Chapter 13 petition, the less impact your bankruptcy case will likely have on your ability to rent a new home or apartment. Showing a prospective landlord that you have made all of your Chapter 13 payments on time as well as your current rent, utility bills, and other expense payments might help.

When you apply for a lease, the landlord will likely pull your credit report to check for evictions, repossessions, judgments, defaults, and late payments. If it looks as if you are still struggling to pay your expenses, a landlord is unlikely to approve your application. However, if you can show that you have kept current with your repayment plan and have not been late on your other obligations, your application to rent a new home might be approved.

Buy a home after filing Chapter 13 bankruptcy

Since a Chapter 13 repayment plan is overseen by the trustee and the bankruptcy court, you must get court approval before you can take out a new loan, including a mortgage. The bankruptcy court will only approve a request to take out a new mortgage if it makes financial sense for you. If you have enough income to fund your Chapter 13 bankruptcy plan, this might make Chapter 13 a better option if you also want to purchase a home as soon as you can.

Mortgage loans after filing for Chapter 13 bankruptcy

The best types of mortgages you can take out after filing for Chapter 13 bankruptcy are government-backed mortgages, including FHA loans, USDA loans, and VA loans. Conventional mortgages will be harder to get after you file for bankruptcy. Both government-backed mortgages and conventional mortgages will require you to complete a waiting period after filing your Chapter 13 petition before you can purchase a new home. The lender will be able to see the date you filed for bankruptcy when it checks your credit reports.

Government-backed mortgages

FHA loans are insured by the Federal Housing Administration for purchasing new homes. If you default on an FHA loan, the government will pay the lender. However, the lender can still foreclose on your mortgage if you default.

The FHA will not approve an FHA loan for people who have received a Chapter 7 discharge within the past two years, and some individual lenders might have longer waiting periods. However, people who file petitions for Chapter 13 bankruptcy can be approved for FHA loans before their bankruptcy discharge. FHA loans have a waiting period of one year after a person files a petition for Chapter 13 bankruptcy.

However, you will need to find a lender who is willing to extend credit to you and then seek written approval from the bankruptcy court before taking on the new debt required to buy a home. The court will consider the mortgage payment versus your current rent payment to determine whether or not the new mortgage makes financial sense for you.

VA-backed mortgages

If you are a military veteran or the spouse of a deceased veteran who died as a result of his or her service, you might be eligible for a VA-backed loan, which is guaranteed by the Department of Veterans Affairs. Before you can be approved for a VA-backed loan after filing for Chapter 13 bankruptcy, you will have to wait at least one year from your filing date.

USDA-backed mortgages

If you are interested in purchasing a new home in a rural area, you might be eligible to apply for a USDA-backed mortgage. A USDA-backed mortgage has a waiting period of three years after a Chapter 7 discharge or one year after a Chapter 13 discharge, so you cannot take out this type of mortgage while you are still in repayment on your Chapter 13 plan.

However, if you have extenuating circumstances, you might be able to apply for a USDA-backed loan after completing one year of timely payments in your Chapter 13 plan. These circumstances must have happened within the 12 months preceding your filing date and can include such things as a temporary illness or job loss that caused the financial circumstances resulting in your bankruptcy.

Conventional mortgages

Freddie Mac and Fannie Mae are private companies that underwrite conventional mortgages and some government-backed loans, and they have their own requirements for extending loans to prospective homebuyers. Both companies frequently require buyers to purchase private mortgage insurance to protect against default on conventional loans.

Fannie Mae will not allow lenders to extend mortgages to people who have had a Chapter 7 bankruptcy discharge within the past four years. The waiting period for a Chapter 13 bankruptcy is two years after a discharge or four years after dismissal. Extenuating circumstances, including high medical bills, divorce, and job loss might shorten the waiting period. Freddie Mac’s requirements are the same as Fannie Mae’s.

Credit score requirements

Ultimately, the waiting period that might be required by different agencies might not be the most important factor. Instead, your credit score will be a critical factor in whether or not you will be approved for a mortgage. The credit score requirements vary between lenders and loan types. For example, the FHA requires a minimum credit score of 500. If your score is at least 580, a smaller down payment will be required.

VA loans do not have minimum credit scores. However, lenders that offer FHA-backed or VA-backed loans can set their own requirements, and most require borrowers to have a minimum credit score of at least 620. This makes it important for you to take steps to improve your credit score after you file for Chapter 13 bankruptcy while you complete the waiting period.

If you want to get a USDA-backed loan, you will want to try to improve your credit score to at least 640. The application process for a USDA-backed mortgage is streamlined for borrowers with credit scores of 640 or higher. If your score is less than 640, your lender will scrutinize your credit history to determine whether or not you are an acceptable risk.

Fannie Mae’s minimum credit score for approval is 620. However, if you want to get an adjustable-rate mortgage instead of a fixed-rate loan, the minimum acceptable score will be 640. Freddie Mac’s credit score requirements are the same as Fannie Mae’s.

Get Help From an Experienced Chapter 13 attorney San Jose Today

It is not impossible to rent or buy a home after filing a Chapter 13 petition. Since you will obtain debt relief through bankruptcy, it can help to speed up the process of improving your credit and your ability to purchase or rent a new home. However, it will be important for you to get approval from the court before entering into a new lease or purchasing a new home with a mortgage. To learn more about your options after filing a Chapter 13 petition, call The Shulman Law Office for a free consultation at (408) 297-3333.