If you are struggling with debt, the possibility of a fresh financial start through the Nevada bankruptcy process may appeal to you. But while there are plenty of benefits to filing for protection under the bankruptcy code, it is important to understand that your decision to file can have lasting effects on your finances and lifestyle. Those consequences will remain in place even if you ultimately never obtain a bankruptcy discharge.
One of the most common issues encountered after a bankruptcy is the difficulty in purchasing a home. And while a bankruptcy filing can affect your ability to obtain home financing in some cases, the good news is that these effects are temporary. With the right game plan, you can own a home after your bankruptcy case is discharged. To do that, you will have to understand how bankruptcy can affect your ability to buy a home.
How Bankruptcy Affects Your Credit Score
The first consideration when it comes to filing bankruptcy is the effect it will have on your credit score. Upon filing, you can expect your credit score to drop immediately. In some cases, this can include a drop by hundreds of points. The negative effect on your credit score will remain for years after your case is discharged, which is one factor that can make getting a home after bankruptcy tricky.
Your credit score is important because it directly impacts the interest rate you must pay on your mortgage. A high credit score is a signal to your potential lender that you are likely to make your payments on time. The inverse, a low credit score, suggests that you are a riskier bet. And while a lower credit score may not disqualify you completely from a home loan, it can result in a much higher interest rate on your mortgage. In other words, your credit score can be the difference in tens of thousands of dollars of interest over the years. And with a bankruptcy on your record, you can expect your credit score will lead to less than favorable interest rates. And if your credit score is too low, you may be unable to find a lender willing to finance your home purchase at any interest rate.
Home Loan Waiting Periods and Bankruptcy
The other major consideration is the potential for a long wait before you are eligible for a home loan after your bankruptcy discharges. Most lenders will require you to wait a certain amount of time after your discharge before you are eligible for a loan. This waiting period, also known as a “seasoning period,” gives you a chance to show you are back on firm financial ground. The waiting period varies, depending on two factors:
- The type of loan
- The type of bankruptcy
Generally speaking, your wait will be shorter if your bankruptcy case was filed under Chapter 13 of the bankruptcy code as opposed to Chapter 7. Additionally, the type of loan product you choose will also have an impact; conventional loans typically have a longer seasoning period compared to those backed by FHA or VA financing.
For Chapter 7 filers, you can expect a seasoning period of at least four years before you will be eligible for a conventional home loan. But if your loan is backed by FHA or VA financing, you may be eligible for a loan within two years of the date of your discharge.
Lenders are even more lenient when it comes to Chapter 13 filers. In many cases, you will be eligible for a conventional loan within two years of your Chapter 13 discharge. And if you have the backing of FHA or VA financing, you may be able to obtain a home loan before your bankruptcy discharges. Some lenders will agree to financing if you show 12 months of on-time payments and permission from the bankruptcy court.
The rules surrounding taking on new debt during your bankruptcy can be complicated, however, so it is important that you discuss your case with an experienced Nevada bankruptcy attorney. Contact Vohwinkel Law today for a free consultation.