How to Purchase a House After Chapter 7 Bankruptcy – Here’s Some Strategies You Can Use
One of the biggest questions I get is “How can I get into a new home after filing bankruptcy?” For this article, I will focus on how to do so after filing Chapter 7, as the process is different when you filed a Chapter 13.
First, let’s get the standard advice you will see all over the internet out of the way. If you filed Chapter 7 bankruptcy, there are two usual waiting periods:
- FHA loans – 2 years after your discharge date
- Conventional loans – 4 years after your discharge date
Should You Really Wait 4 Years to Get a Home Loan?
Note that the date is generally after your discharge date, not when you filed. This can seem like a long wait, but for most people it is advisable to wait out the full 4 years before you try to purchase a home again. Why wait the full 4 years? The first reason is because FHA loans have a lot of costs involved. For example, there is a 1.75% origination fee. That means on a $300,000 loan you will have an additional $5,250 added to the loan balance (after subtracting for your down payment.)
In addition, ALL FHA loans require Mortgage Insurance Premiums (MIP). This is an additional fee that you pay every month that is a complete waste of money. Generally, the amount will be around $200-$250 per month, but will fluctuate with the size of the loan. This is a lot of money to waste every month.
The one good thing about FHA loans is that the interest rate is usually lower. Sometimes the lower interest rate can balance out with the MIP payment, which means a regular loan with no MIP with a higher interest rate may end up being about the same amount of loss to interest or MIP every month.
Again, my first suggestion is to keep renting until you can get a conventional loan the normal way with 20% down and a good cash backup plan. Paying all the extensive fees and moving costs with getting a new home when you are fresh out of bankruptcy is not a good idea. You will be much better off maxing out your 401k contributions and going with a low rent. In fact, low rent is a great way to save because it is a fixed cost. You never have to worry about expensive repairs which is outstanding. You need to relearn how to save and invest for the long term and get back on track.
Is It Possible To Get A Mortgage Much Sooner Than 2 or 4 Years?
Yes, it is possible. You can get loans that are neither FHA, nor conventional, with a shorter waiting period. You will generally need 10-15% as a down payment. You will also have to pay a higher interest rate, which makes these not attractive. However, if you have a high income or other unique circumstances, you can purchase a home very quickly. Just realize that you are paying a big premium to do so and you would be better off renting for cheap in nearly all situations.
Rent Cheaply – Live Bigly!
You want to rent a place that is as cheap as you can. It’s very simple – the lower your rent, the more you can save for a house. You must learn how to save a significant portion of your money every month or you will never be able to handle the financial burden of a new house. It is never good to be right at the edge of affordability. You want to be saving around 50% of your pretax income! This sounds like a lot, but it is definitely possible! You want to be taking full advantage of tax advantaged accounts, such as 401ks and IRAs. This is a much higher priority than purchasing a house.
There is nothing wrong with renting, there are only problems with renters! The problem with most renters is they have low income and they spend it all. If you can increase your income, pay low rent, and maximize your savings, you can have huge rewards in the future, far above what is expected for your income!
Final Recommendation – Rent Cheaply, Save Bigly! Purchase a home 4 years after bankruptcy discharge with a big cash cushion and with lots of retirement savings! Get your saving and budgeting on track and you’ll be in great shape for the rest of your life!