Q: I’m trying to buy my first home. I filed bankruptcy just last year due to a divorce. It was discharged six months ago.
Is there anyone who will give me a home loan? My credit score is 629 and I’m rebuilding credit with a credit card and a new truck loan. I have already found a house that I would really enjoy owning but my bankruptcy is interfering with my plans for homeownership. Please give me some advice.
A: In the new world of mortgage finance, there is a time-out period for those who have gone into bankruptcy, foreclosure or who have completed short sales or a deed-in-lieu of foreclosure.
Even if your credit score was high enough to qualify, you will have to wait up to five years (it could be longer, depending on your personal situation) to qualify for a conventional mortgage (one that Fannie Mae or Freddie Mac) or government-backed loan (FHA or USDA). Unfortunately, Fannie Mae, Freddie Mac and FHA are buying more than 90 percent of all loans on the market.
What does this mean for you? There simply aren’t many investors in the current mortgage marketplace who would be interested in taking a risk on a home buyer who is just six months out from his bankruptcy discharge.
Here’s an idea: Why don’t you see if the seller would agree to a lease with an option to buy (also known as rent-to-own) or would be willing to finance the sale of the home with seller financing.
In the case of a lease with an option to buy, you pay a non-refundable option fee (which may be renewable) and then settle on a monthly fee for leasing the property. You have the right to purchase the property at a later date, at a specific sales price, but are not obligated to purchase it. Once you find a lender willing to finance the purchase of the home, you can notify your landlord/seller to move forward with the purchase and sale of the home.
You can live in the property for 3 to 4 years, and then see if you can qualify for a mortgage. If not, you can live there another couple of years and try again.
The seller may be happy to receive your rent payments and can move on with his or her life.
If you find a seller willing to give you seller financing towards the purchase of the home, you might find that the seller is willing to do this to get some money now and payments over time until you are able to refinance the home and pay off the seller completely.
Ask your seller if he would be willing to do this, and then find a real estate attorney who can draft up a contract that protects you. There are risks in a seller financing situation for you and your seller, so be careful and make sure you understand what is going on and the risks you might be assuming.
Good luck, and let me know what happens.
UPDATE After this column was published, I heard from two lenders who tell me that they are now able to secure FHA financing for borrowers who had their bankruptcy discharged at least two years prior, as long as they don’t have any additional bad credit. Borrowers going through a Chapter 13 may be able to secure a loan as well. For conventional loans (those purchased by Fannie Mae and Freddie Mac), a different lender told me that he is able to secure financing 3 to 4 years after a bankruptcy has been discharged. If you have additional comments, please leave them below.