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Home loan approval after bankruptcy may not take as long as you think

Many people in Ohio were hit hard by the recession. This blog has discussed a number of issues that Cincinnati area residents have faced. The foreclosure crisis generally had an adverse impact on the housing market, leading to a spike in underwater mortgages nationwide. Layoffs during the recession put a squeeze on many household budgets.

In a typical economy, medical debts, divorce or the death of a spouse can place an individual into a dire financial situation. These types of one-time events continued to affect Ohio residents as well throughout the recession and the recent attempts at economic recovery.

Financial stress has led many to consider seeking some form of debt relief, including filing for bankruptcy. Many consumers worry about what effect a bankruptcy can have on a potential future home loan application, or refinancing opportunity on a home loan after a bankruptcy.

Many Cincinnati residents may believe that a bankruptcy will make it impossible to seek a home loan for a decade or more. The good news is-- that does not have to be the case. A person who works diligently to pay their bills on time and re-establishes credit after filing for bankruptcy may be able to obtain approval on a home loan in much less time that many people think.

In fact, mortgages backed by the Federal Housing Administration are allowed in as little as one year after a consumer successfully completes a chapter 13 bankruptcy payment plan. The American Bankruptcy Institute says that the vast majority of personal bankruptcies are filed under chapter 7-the ABO says that roughly 70 percent are filed under a chapter 7 liquidation. FHA mortgages are allowed in as little as two years following a chapter 7 bankruptcy.

In seeking a conventional mortgage, the rules under Fannie Mae and Freddie Mac take a little longer. Those rules generally call for a wait of two to four years following bankruptcy.

Obviously, the rules are not a hard-and-fast blanket approval on a future loan. In each case, a consumer must re-establish credit before obtaining an approval for a home loan. Surrendering a home into bankruptcy and discharging a loan may also delay a future approval.

But many consumers fell into financial distress after being caught up in the abrupt changes in the economy, and bills piled up due to external reasons, rather than a lack of diligence on the consumer's part. Bankruptcy can provide many with a fresh start, and the long-term consequences may not be what many believe them to be.

Ohio residents who are weighed down by unmanageable bills may want to consider speaking with a bankruptcy lawyer about their financial situation to learn what debt relief may be available under the bankruptcy code.

Source: New York Times, "Life After Bankruptcy," Vickie Elmer, Sep. 13, 2012

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