A Buyers Guide: Bankruptcy, Foreclosure and Short Sales

A bankruptcy is a difficult thing to go through and if you have ever been through one, you might be wondering how it can affect your ability to purchase a home in the future. Even if you have a bankruptcy, a foreclosure or a short sale in your past – you may still be qualified to purchase a new home and maybe even sooner than you think.

The Basics

The legal terms of bankruptcy can be complicated. Let’s go through some basic definitions:

Bankruptcy

• Chapter 7: This is a “fresh start” bankruptcy in which all debt is canceled. Debtors must repay the bankruptcy court with certain property and assets. If the debt exceeds what the assets can cover, the rest of the debt is forgiven.
• Chapter 11: This is typically used by businesses, but someone with a large amount of assets can also file bankruptcy this way. Unlike Chapter 7, debt is not canceled but rather repaid over an extended time period.
• Chapter 13:  For debtors who wish to keep their assets and property, they can file Chapter 13 bankruptcy which deducts a portion of their income to repay their outstanding debt. After 3-5 years of repayment, the rest of debt is often canceled.

Foreclosure

When a homeowner can no longer afford to make payments on their home (typically due to an inability to work, divorce, or excessive debt), they may abandon the home or deed it over to the bank to avoid paying more towards a home they can’t afford. At this point, the sale of the home is up to the bank, and they will get the profit from that sale.

Short Sale

A short sale occurs when a home has a large amount of liens (a notice that you owe money to a creditor) which outweigh the home’s worth. If the lien holders agree to accept less money than they’re owed for the homeowner’s debts, the house is sold in a short sale. The “short” in this title refers to the debts being “shorted”, not the amount of time this sale takes. It is often a much longer process than a typical sale.

Do You Still Qualify?

If you want to know if you can qualify for a home purchase but you have been through a bankruptcy or foreclosure – be prepared to share some information with your loan officer:

• What kind of bankruptcy did you file for and when was it discharged?
• Was a foreclosure, deed in lieu of foreclosure or short sale involved in the bankruptcy and if so, what is the address for the home? Additionally, was your name on the mortgage for the foreclosed home and when was the dismissal date of the foreclosure?
• Were there any extenuating circumstances that caused you to file for bankruptcy/foreclosure, i.e – being laid off from your job, suffering the loss of a spouse, etc?
• Are you taking part in Consumer Credit Counseling?

Your loan officer should be asking you these questions to get the full picture and this will allow them to better assist you. Be prepared to send bankruptcy and foreclosure documentation to your loan officer so that they may determine your eligibility.

After filing for any chapter of bankruptcy, there are waiting periods in place before you can apply for a new home purchase. These waiting times vary depending on the type of bankruptcy or foreclosure you filed. This “seasoning” after your bankruptcy dismissal will also vary based on the type of financing you are searching for. Seasoning periods can be as short as 12 months or as long as 7 years. If you have experienced a Chapter 7 or Chapter 11 bankruptcy your waiting time for your mortgage will be longer than if you filed a Chapter 13 bankruptcy. If a foreclosure was part of your bankruptcy, it could be even longer.

It is not uncommon in a Chapter 13 bankruptcy for a borrower to obtain a mortgage even if the bankruptcy has not been dismissed as long as the borrower can obtain the court’s permission. If you are currently in a chapter 13 bankruptcy and are wondering if you can refinance your home or purchase a home while you’re going through this, ask your Ruoff Mortgage loan officer and they can walk you through the process and answer your questions to see if you qualify.

If you did not personally file bankruptcy but you were on the mortgage or on title for a home that was part of a bankruptcy, foreclosure or short sale, be sure to let your loan officer know so that you do not end up with any unpleasant surprises that can affect the success of your loan closing.

What's the Next Step?

The best thing you can do to prepare yourself for a home purchase or refinance after a bankruptcy is to keep all of your paperwork from your bankruptcy in an organized file and to be completely honest with your loan officer so that they may have the greatest chance of success in helping you fulfill your homeownership goals.

Additionally, bankruptcy will affect your credit score. So, take the time you have now to improve on that score in order to make it cheaper and easier to obtain a loan in the future. With loan officers from Ruoff by your side, you'll be kept informed, updated, and encouraged throughout the process.