Since the new bankruptcy laws took effect on October 17, 2005, more Americans than ever before are filing for relief using the federal bankruptcy laws. The vast majority are simply overburdened and cannot pay their open obligations.

However, for many applicants, the opportunity to own a home may be possible immediately upon discharge. Ironically, some who previously did not qualify for a mortgage do qualify after bankruptcy.

How is that possible? An example of this is Dave Olson (a fictional character). He earns $4,000 a month, spends $1,000 on rent, $250 on car payments, and $2,000 on minimum credit card payments. This person’s DTI* (debt-to-income) ratio is 81.25%. Since his credit score is low (mid 600 FICO), the only option is a mortgage that requires full documentation. Most of those loans require a maximum DTI of 50-55%.

Chapter 7 bankruptcy is filed and Dave gets a discharge. He reaffirms his car loan and still rents for $1,000/month. However, now his monthly debt is much less ($1,000 + 250)/4,000=31.25%.

In fact, bankruptcy has increased your chances of obtaining financing for a purchase. Many times, the credit score is the same after bankruptcy as it was before filing (unless creditors report it incorrectly). By filing simple dispute letters with all three credit bureaus, those discrepancies can be cleared up in a few months.

It makes sense that borrowers are more prepared to borrow for home purchases after bankruptcy because they can’t file Chapter 7 for 6 years, their obligations are reduced, and the property being purchased is insured. That means the lender can repossess the property if payments are not made on time.

There are a few things to keep in mind if you are buying a home after a recently discharged bankruptcy.

1) A down payment is not always necessary, but it will improve the rate.

2) Most people opt for an Adjustable Rate Mortgage (ARM) as the rates are much lower than a fixed one and they plan to refinance in 2-3 years.

3) Most of these loans have a prepayment penalty that coincides with the fixed term of the financing.

4) Most lenders require canceled checks or verification of rent paid no later than 30 days in the last 12 months.

5) A pre-bankruptcy foreclosure is hard to beat. A foreclosure as a result of bankruptcy generally does not count.

Everyone’s situation is different. To ensure the best service, be sure to contact an experienced mortgage originator who will take the time to listen to your situation and explain all the possibilities. It shouldn’t cost you anything to ask.