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I have contacted several lenders and no one seems to know about being able to finance after one year out of BK Chapter 7 with extenuating circumstances.  Can you please advise as to whom is knowledgeable of this.  And if they can service my loan in Michigan?
asked Oct 2, 2018 in Buying a Home by anonymous

1 Answer

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Good morning and thank you for writing. There are several things in play here. First, there is a bankruptcy, a major derogatory event. There are three mainstream programs that allow financing 1 year after a Chapter 7 bankruptcy with extenuating circumstances. They are the FHA, VA and USDA mortgage programs -- backed by the government. Note that you need a military connection to be eligible for VA home loans, and that there are income restrictions and geographical limits for the USDA program. The FHA loan has no eligibility test. All programs have loan size limits and can only be used to buy a primary residence.

There are also "non-prime" programs that will finance you as little as one day out of bankruptcy. Expect to make a significant down payment, and to get hit with high upfront charges and interest rates.

The next factor is that you have extenuating circumstances. Qualifying extenuating circumstances depend on the program. Some, for example, allow divorce as an extenuating circumstance and others do not. The problem itself must have been significant enough to cause a large rise in expenses or significant drop income -- like a serious illness, the death of the primary earner, or a massive layoff at your company that cost you your job.

Extenuating circumstances are only recognized if the problem has been successfully overcome and is unlikely to recur. Lenders also prefer to see that you are managing money responsibly now. For instance, if you recovered from your illness (fully) or find a new job and are working, that shows the problem has been solved.

If you have been making your payments on time (rent, utility, "second chance" credit card, auto loan, etc.), that goes a long way toward proving that you are financially responsible. Note that you have to be able to prove these things -- that there was a massive layoff, for instance, and that you were not terminated for cause. You'll need to show that you have a new job with enough income to support a house payment. And if you can show regular deposits to a savings account and 12 months of on-time payments to your landlord, that's all positive.

Finally, there is the problem of lender discretion or overlays. Just because program guidelines say lenders CAN loan money to you 12 months out of bankruptcy doesn't mean they WILL. It depends on their policy (tougher-than-required policies are common and these are called overlays) and if it allows a loan 1 year out of bankruptcy under ANY circumstances.

Perhaps the most important consideration is how strong is the rest of your file? You have a much better shot if you have a larger down payment (say, 5 or 10 percent for an FHA loan instead of 3.5 percent), a decent credit score, emergency savings after closing (at least 2 months of mortgage payments), and sufficient income to easily pay the mortgage. If you are fresh out of a Chapter 7 and have no other debts, you may be able to get away with a mortgage payment (principal, interest, taxes and insurance) of 31 percent of your gross (before tax) income for FHA, 29 percent for USDA, and 41 percent (with no other debt) for VA loans.

There is no list of lenders that will automatically approve such a transaction. But your chances are better if you have well-documented the circumstances, that they won't recur, that you are saving money and managing debt intelligently, and that you earn enough to successfully cover your new housing expense. And then, come to terms with the fact that you will probably have to contact a lot more lenders than average to find one that will take on this loan. Good luck, and thank you for  writing.
answered Oct 3, 2018 by GinaPogol (47,650 points)
edited Oct 3, 2018 by GinaPogol

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