Purchase a second home after Chapter 7

[Cody Dircksen]

Hi I'm new to BP, but have a passion for personal improvement. I've made many improvements throughout the years and done quite well for myself. Unfortunately roughly a year ago I tried leaping into buying a business that went south on me and blew up in my face. A year later, I just finalized my chapter 7 bankruptcy. 

Backstory to that, I had bought my home at 20 years old (I'm now 24) and had been acquiring much equity. The house is at roughly 60-40 financed-equity. However, with my recent bankruptcy, I am NOT trying to get rid of my home and longest credit reporting account. Which brings me to today. 

I just finished remodeling my home on a barenuckle budget. It looks emacculate and am speaking to a pm company this week about renting it out. Will likely get 2000$ a month for it and at 8% fee, pocket 390$ mo. 

How long do I need to wait before buying a new home? My credit is still good, the ch 7 is the only negative thing I've had on my credit. Can I claim the rental property as income? How likely would it be that I could rent another house out in 2 years if I bought again? What would I be looking at for repairing the credit to a reasonable rate of finance? I'd really like to know how I can persist through the turbulence of this and begin climbing back up in altitude. Thanks!

[Albert Bui]

HI Cody,

You can use rental income immediately as long as you have a rental agreement + copy of security deposit on file atleast within the context of FHA and conventional in general instances, however depending on your situation you may not be allowed to use rental income as well.

If you're thinking "how much of the rental income can I use?" the answer is 75% of gross monthly - PITIA so while you are making 390 per month  in real life, using this calculation you may have a different outcome regarding your cashflow.

"Can I Claim it as rental income," well it depends on the context you're asking....

1) Are you trying to claim you get rental income while you're living in the property? 99% chances are no you cannot in this scenario. There are programs that allow you to use room mate or "boarder," income (lender definition of this income) but its only for first time buyers, people with no real estate currently, or for caretakers who pay you and take care of you while you're living in your house (you're the disabled person in this context).

2) Are you trying to claim the rental income while you're moving out of the property to buy a new property (primary residence) ? yes you could use rental income in this scenario if you're using conventional financing, but if you're using FHA there will be restrictions when you're using rental income to qualify while vacating/leaving your current primary residence.

3) Are you trying to claim rental income while living in your current residence to buy a second home (a property acting as a second primary residence usually near a resort or vacation type area - park city, Honolulu, Miami, etc)? In This situation your qualification will be similar to scenario #1 since you're trying to use rental income while living in your current home still is considered "boarder or room mate," income and in 99% of scenarios cannot be used. Also second homes are second homes and cannot use rental income to offset the monthly payment because they would otherwise be considered investment properties if you were using "rental income."

Ultimately...Are there ways to qualify and use rental income going forward? sure there are ways to make it feasible. The above are just some straight forward answers with assumptions on your situation however if you change your context or situation your lending scenario/answer also can be drastically different as well.