Bankruptcy

11 Replies

I filed chapter 7 bankruptcy 2 years ago. Since that time I reestablished credit with a score about 650. I also purchased my home cash. So I have full equity. My question is how long after bankruptcy will lenders start to lend to me for investing? I do understand there are some other ways. I just don't know them all yet as I'm just starting.

@Michael Cornell  

I have heard 2-7 years but it depends on the kind of bankruptcy. I have noticed that different offices have different rules. So I would definitely talk with regular banks, credit unions, and mortgage brokers. 

Originally posted by Elizabeth Colegrove:

@Michael Cornell 

I have heard 2-7 years but it depends on the kind of bankruptcy. I have noticed that different offices have different rules. So I would definitely talk with regular banks, credit unions, and mortgage brokers. 

 Thank you. I spoke to my bank and another they where both telling me 3 years. Just wasn't sure if there was another type of "investor friendly" bank.

@Michael Cornell  

I have found that you have "basic" rules that are federal and than you have each institution making their own. It sounds like that might be a federal bank. I would make sure you check with all 3 of the types of institutions I mentioned. They all have very different "institutional" rules. It is not about finding a "investor friendly" bank. But a bank who has rules that fit the incident that you are facing in this case bankruptcy. 

On a different matter but similar, my husband is deployed. I have noticed that my brokers have very different rules on what they allow with poa's. I have worked with 4 different brokers and they have all been VERY different.

Probably a silly question. But what is a POA?

Since you are only 2 years out from the chapter 7 BK you might not fit into standard investor loans.

Many loans are packaged after origination and sold on Wall Street. Because of the last downturn there have been STOPGAPS put in place with originated loans that are sold off. One is a buy-back provision where the originator has to buy back the loan upon default if certain standards were not met etc. So that makes originators want vanilla buyers with little issues.

Look for a local bank that keeps the paper in house ( meaning they originate and service their loans and do not sell them off ). It helps if you have your substantial deposits with them etc. as the local branches  are more relationship based. They can look at your situation and maybe flex some where people selling off the note can't.

Michael POA is "power of attorney". A document authorizing someone to perform an action on your behalf.

There are varying types of POA's with one being a limited to perform just that one action then it goes away versus a full unlimited one with total authority to make multiple decisions on their behalf etc.

@Michael Cornell  

According to Fannie Mae, the waiting period is 4 years, measured from the discharge date, for a Chapter 7, unless there are "extenuating circumstances", in which case it could be 2 years.  I briefly searched the underwriting guidelines but didn't find what they meant by "extenuating circumstances".  Maybe you can find it. But below is there link.  Alot of good info there.

https://www.fanniemae.com/content/guide/selling/b3...

I am a bankruptcy attorney and I regularly have old clients contacting me who are applying for loans and they need proof of their discharge. The FHA guideline is 2 years:

http://portal.hud.gov/hudportal/documents/huddoc?i...

This is from your discharge date and is for a FHA insured loan (a lot of them!). Obviously everyone has their own way of doing things but don't give up with the first no.

405-426-9677

@Paul Choate  @Michael Cornell  

The problem with an FHA loan is that they have to be owner occupied. The requirement is that you occupy within 60 days, and then occupy for 12 months. There are a few exceptions to this: for instance, I believe you can buy a HUD house with an FHA loan, but I think it has to be approved. If memory serves, FHA quit allowing non-owner occupants back in 1989, at the same time that they put a due on sale clause into their security instrument. As an aside, I still have 2 of those old loans pre-1989, that don't have a due on sale clause.

Here's a link to the underwriting guidelines:

http://portal.hud.gov/hudportal/documents/huddoc?i...

Here's a link to an article on FHA.com website:

http://www.fha.com/fha_article?id=371

One thing about it is, perhaps you could buy a another property with an FHA loan as an owner occupant, and then rent out your current property. Don't know is that would be practical for you or not. The thing I would not do is miscategorize whether you are a owner occupant or not. That breaks federal law.

BTW, as someone said above, if you can find a small portfolio lender that might do somethng different than the above guidelines, IF you had enough compensating factors to the bankruptcy, like credit established, stable job, plenty of income, etc.  The problem I think you'll face though is that you're want to be a non-owner occupant, which the lenders are more reluctant about to begin with.  And finally, don't do anything negative of any type, no 30 day lates, no small collection accounts, etc...it becomes magnified after a bankruptcy in a lenders eyes.

So in theory since I own my home free and clear, I could get an FHA loan on the equity? then I can use that to start investing. Or won't they give a loan on the equity?

@Michael Cornell  yes. That would be my suggestion. You can tap the equity in your home and you are more likely to be approved as an owner occupant. Once you have established a track record with your rental properties, you will be more attractive to lenders for purely commercial loans. I would also search this site for "house hacking" as it is a great way to start. 

People think that bankruptcy is the end of your credit. I think you will find that the opposite is true. Lenders know you have the same income after filing, probably the same assets and you can't file for 8 years. Obviously, you need to shop around and take your time to find a good lender who will treat you fairly. Also, you want to be extra sure that you correct whatever caused the bankruptcy in the first place (if possible- you cant control every thing). 

@Jim Piper  is right. He provided a better answer to your original question about how long it will take to get a loan for investing. I doubt that you will do very well jumping straight to commercial/rental loans if you have not shown a track record on a personal home loan first. You will also probably get a better rate anyway as an owner occupant. 

That has been my experience at least. I built my first home with cash I had saved, took out a loan on it and then bought my first rental properties. I then put a loan on them to buy more. I have never purchased a rental with financing. I have always financed out the equity for the next one.

405-426-9677

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