Many people believe that buying a home after bankruptcy is impossible. While a Chapter 7 or 13 bankruptcy can complicate the home purchase process, you can still buy a home. You can learn critical points below about how to purchase a house after a recent bankruptcy.
If you’re considering bankruptcy, you may want to have an experienced bankruptcy attorney review your case at no charge.
Expect To Wait Two Years
After the bankruptcy court finalizes your case, you’ll need to wait to apply for a mortgage, usually for two years. Think about it: You just completed bankruptcy, and your credit report is probably marred with negative marks from late payments and nonpayments of credit cards, mortgages, car payments, etc.
Now that your bankruptcy is over, you need to focus on rebuilding your credit and showing a potential mortgage company that you can be trusted with a mortgage.
So, make sure that you pay all of your bills on time, such as your rent, utility payments, and any credit accounts you still have.
If you don’t have any credit accounts after bankruptcy, consider applying for a bad credit card or a secured credit card. This is a card that you ‘fill’ from your bank account with a fixed amount, such as $250. Then, as you buy things with the card, it is reported to the credit bureaus that you are making timely payments.
You should work on re-establishing your credit for about two years. Then, if you can show you’ve made on-time payments for that period, you should be able to qualify for some mortgages again.
Consider A Small Car Loan
Another way to build credit is to buy a used car. Even if your credit score is well under 600, you probably can get a high interest approval through lenders who cater to people reestablishing their credit.
True, you’ll have a high interest rate, but paying a car loan on time helps you boost your credit score quickly. Installment loans with a good payment history count for a lot on your credit report.
Hopefully, you can pay off an affordable used car within two years. If not, you may be able to refinance it at a lower rate when your credit score moves into the 600s.
Consider An FHA Mortgage
One of the best options for credit-challenged borrowers who are two years out of bankruptcy is the FHA loan. This is a federally-backed loan that allows you to have a credit score as low as the 580s and still get approved.
If you qualify for an FHA loan, you may be able to put down as little as 3.5% of the down payment, but this varies by lender.
These loans are backed by the US government, so the interest rates are competitive. And if you shop around, you may find a lender who will work with you with a credit score under 600.
But you will need to show you have the income to pay your loan, as well as a steady payment history for at least a year since your bankruptcy.
Boost Your Savings
Another great way to show a mortgage lender that you have your finances together after bankruptcy is to build cash reserves in your savings account.
If you can show the lender that you have three or four months of mortgage payments in the bank, it may make it easier to get approval. People with savings in the bank are viewed as a lower risk by mortgage providers.
So many people think they cannot buy a home after bankruptcy. But if you reestablish your credit and make payments on time, you may be able to own a home in as few as two years.