Buying a House While in Chapter 13 Bankruptcy

Despite the economic downturn brought on by the coronavirus pandemic, low mortgage rates remain an attractive option for many people considering buying a house. Even if you are in the middle of a Chapter 13 bankruptcy repayment, you might still be able to obtain a mortgage loan and buy a new home. While there are often several hurdles that people face when requesting new credit like mortgages during bankruptcy, there are strategies that can be utilized to navigate these obstacles successfully. The following reviews some important details that you should understand about mortgage and bankruptcy. 

# 1 – Be Patient

For many people, it is a good idea to remain patient during the bankruptcy process. Lenders are often more willing to lend a person money once they have proven their creditworthiness following a bankruptcy discharge. Not to mention, most people experienced improved credit scores after bankruptcy, and people with good credit scores are likely to obtain better mortgage rates. Waiting until the bankruptcy process, however, may not be the best advice for some people. 

# 2 – Ask Yourself Tough Question

There are several tough questions you should ask yourself before you decide to take action toward purchasing a house. For one, you should ask yourself why you need to purchase a house now and cannot wait until later. If you simply want to move up or are interested in a vacation, waiting is likely a better idea. If you are interested in downsizing, this might be a reasonable goal while you navigate Chapter 13 bankruptcy. 

Second, you should ask yourself where you will obtain the amount that will be used as a down payment. If you are planning on making a sizable down payment, the trustee will likely inquire why you are not including this money as part of your repayment plan. If your family or a friend is paying the down payment, however, this might be acceptable. Even a personal loan, however, is still a type of credit that must be approved by a person’s trustee. Third, you should consider whether you will be able to stay up to date with your payment plan. If you can not keep up to date with your payment plan, the court is likely to approve your new mortgage.

# 3 – Speak With Your Trustee

United States bankruptcy courts state that when a person wants to begin Chapter 13 bankruptcy, they must submit a payment plan that states what they will live on while everything else goes to creditors. At the end of this payment period, the court erases any remaining debts. To modify this plan, a person must obtain court approval. As a result, if you want to purchase a home, the first step should be to speak to the trustee who is assigned the responsibility of administering a Chapter 13 repayment plan. If the trustee has any concerns about your ability to handle debt, the trustee can block your application to the court for permission to purchase a home. 

# 4 – Review and Consider Lenders

Bankruptcy negatively impacts a person’s credit report. The more that a person resembles a credit risk, the higher the interest rate for the mortgage will be, and the more that a person will be required to make as a down payment. This is why it is a good idea to properly consider lenders. For example, by obtaining a Federal Housing Administration loan, you will be able to obtain a lower interest rate and lower down payments. 

While people must wait one year into bankruptcy and have filed for bankruptcy due to reasons outside of their control to qualify for a Federal Housing Administration loan, if you have made your payments on time and obtain trustee approval, the loan might be a possibility. You will likely need good credit, employment security, the court’s approval, and to meet other financial qualifications before the Federal Housing Administration will approve. Even if the Federal Housing Administration backs a loan, you will still need to find a lender that offers the best interest rate. 

# 5 – File a Motion with the Court

The next step if you have decided to obtain a mortgage is to file a motion with the court to purchase the home and take on the mortgage. Provided that your trustee approves of your decision, the court will also likely approve your motion. There is never any guarantee, however, how a court will rule. If a court decides to approve this mortgage, it will alter your repayment plan to reflect your ability to pay the mortgage amount. Only at this point will you be able to fill out the loan application. 

# 6 – Selling a Home During Bankruptcy

While it might be difficult to purchase a home during Chapter 13 bankruptcy, it is often a much easier process to sell a home. Assuming they wait 21 days after filing for bankruptcy, individuals retain their right to sell a home after filing for Chapter 13. People who want to sell a home during Chapter 13 bankruptcy, however, must file a motion to sell, which will include either a house appraisal or other paperwork establishing the home’s value as well as a proposal for how proceeds from the sale will be distributed. 

A trustee must then review this paperwork and determine whether your motion to sell the home is reasonable. If the trustee agrees about your decision to sell a home and the sale closes, you must then file a statement of sale with your trustee. This statement includes details about the home’s sale price, closing deductions, any balance from the property used to pay the mortgage, and disclosure of any proceeds remaining from the sale. 

Speak with an Experienced California Attorney

While the bankruptcy process is challenging, with the proper strategy, it is possible to still achieve many life goals even while the bankruptcy is still active. If you need the assistance of an experienced bankruptcy attorney, do not hesitate to contact attorney Melanie Tavare today to schedule a free case evaluation.