Homeownership After Bankruptcy or Foreclosure? It’s Possible for Most

For many Americans who see homeownership as a part of the American Dream, losing a home due to a foreclosure or bankruptcy can seem like the end of the world. Due to the trauma that such an event can inflict, homeowners who have lost their home may think that it is impossible that they will ever own another home.

Fortunately, however, this is not the case for many homeowners. Recent interviews with more than 30 lenders, realtors and consumers indicate that many former homeowners are able to purchase another home, even though they recently experienced a short sale, bankruptcy or foreclosure.

The Road Back to Homeownership

After the bankruptcy or foreclosure, it is important for the former homeowner to rebuild his or her credit before attempting to buy another home. Although bankruptcies stay on credit reports for seven years, it is possible raise credit scores significantly in a matter of months by lowering debt, making consistent on-time bill payments and not taking on more debt.

In as few as two years after the bankruptcy or foreclosure, many Americans who have taken steps to save money and rebuild their credit are able to purchase another home. One popular means of accomplishing this is with the help of a loan from the Federal Housing Agency (FHA). The number of such loans has increased dramatically in the past few years, due to many homeowners not being able to qualify for a conventional mortgage.

Although a conventional mortgage usually carries a lower interest rate, it requires a hefty down payment of 20 percent, proof of income and a healthy credit score of at least 720. FHA-backed loans, on the other hand, require a lower credit score of 620 and a lower down payment of 3.5 percent of the purchase price.

A downside to FHA loans is that they require a mortgage insurance premium of 1.75 percent of the loan and a yearly payment of 1.25 percent of the loan in addition to the regular loan payments. Even with the disadvantages, FHA loans can be more affordable than conventional mortgages.

In addition to FHA loans, some former homeowners may be eligible for first-time homebuyer programs that assist buyers with closing costs and down payments. To be eligible for these programs, it is not necessary that the applicant never have owned a home. Generally, all applicants are eligible who haven't owned a home within the prior three years.

Consult an Attorney

If you are in debt and considering filing bankruptcy, it can seem like you are trading your right to have a credit card, own a home or have a car for the relief of your debts. In the vast majority of cases, this is not true. Contact an experienced bankruptcy attorney who can explain the process to you and how it will affect your future financial situation.