Bad Credit Series: Buying a Home After Bankruptcy

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It goes without saying that filing for bankruptcy is a major decision that can have a significant impact on your life for years to come. Even after the bankruptcy is discharged, you may have difficulty securing loans or lines of credit for several years. Recovery is often slow, and it may take some time before you are fully recovered from the effects of your bankruptcy.

One big problem you may face is the question of how to buy a home after bankruptcy. This often occurs when someone uses a bankruptcy to get financial problems under control and manages to get back on their feet afterward. As their finances improve and they move toward home ownership, that bankruptcy can rear its ugly head and make the process much more difficult. You may even worry that your bankruptcy will make it impossible for you to own a home for years to come.

Never fear, though: It is possible to buy a home even if you’ve filed for bankruptcy. It may not always be as easy as it would have been without the bankruptcy, but you shouldn’t have to give up your dream of home ownership just because you’ve had financial issues in the past.

How Bankruptcy Works

Bankruptcy is a legal process in which the court guides an individual or business through debt repayment and forgiveness. When you can no longer afford to pay your debts and have no reasonable path toward repayment, you petition the court to grant you a bankruptcy and begin down the generally long road toward being free of debt. There are two primary types of bankruptcy that individuals file: Chapter 7 and Chapter 13.

Chapter 7

A Chapter 7 bankruptcy is the most common type of bankruptcy and is what most people think about when they use the term “bankruptcy.” When you file Chapter 7, you must liquidate a significant portion of your assets. After that, the raised money is used to pay some of your creditors. Once the liquidation and repayment are complete, any remaining debt is discharged by the court.

If you own a home when you file for Chapter 7 bankruptcy, you can lose it if you don’t explicitly ask for an exemption to prevent this. But some homeowners choose to let their home go, since federal and state laws can protect at least a portion of your equity to help you get back on your feet after the filing.

Chapter 13

A Chapter 13 bankruptcy is designed to help you restructure your debts to make repayment easier. This isn’t a large liquidation like a Chapter 7; instead, the court works with you to create a payment plan to repay any outstanding debts. As long as you make payments on the plan, you’re protected against lawsuits or other actions by creditors. Once you make the final payment, your remaining debt may be discharged.

There is a greater opportunity to save an existing home with a Chapter 13 filing if you are facing foreclosure when you file. The filing stops any active foreclosure and may even help you sort out your loan payment issues. But as with Chapter 7, there are Chapter 13 situations in which you might benefit from selling your home to aid with your payment plan.

Get a Home Loan After Bankruptcy

Regardless of whether you lost a home or have never owned one, if you want to buy a home after your bankruptcy is discharged, then it’s going to take a little work. There are a few factors at play here, including your credit score and how much time has passed since your bankruptcy was discharged. To give you a better idea of how these factors can affect your likelihood of getting a home loan, let’s take a closer look at each in turn.

Rebuilding Credit

If you had to file for bankruptcy, there’s a good chance that your credit score went south at some point and never really came back up. Bankruptcy or no, you’re going to have a much harder time getting a mortgage with a credit score under 620. When you factor in the bankruptcy itself (which can stick around for seven to ten years) then your credit score will be a major drag on your chances of getting a home loan.

You’ll need to do what you can to really improve the look of your credit if you want to maximize your chances of getting a good loan. There is no “magic bullet” for fixing your credit, but here are a few things that you can work on to get things in better shape:

  • Establish new lines of credit with secured credit cards or other secured credit products as soon as possible after your bankruptcy is discharged.

  • Get a copy of your credit report and look for errors or inaccuracies. Dispute any questionable information to get it removed from your report.

  • Apply for a small loan that you’ll have to pay off in multiple installments. You may have to wait at least six months to a year before doing this as your bankruptcy will make getting even small loans more difficult while it’s still recently discharged.

  • Work out payment agreements for any debts that weren’t included in your bankruptcy (or any that didn’t get fully discharged once the bankruptcy was complete). These old debts can still adversely affect your credit score, so it’s important to bring them current as quickly as possible.

  • Make sure that you don’t have any missed or late payments for any payments that you have to make.

  • Avoid building a significant amount of debt, but make sure to use your credit cards at least periodically to show that you have active revolving credit.

Even if you follow these points and work hard at improving your credit, it still might take some time to see an improvement. This all depends on how bad of shape your credit report was in and which debts were discharged by your bankruptcy.

Time Lapse

The amount of time since your bankruptcy was discharged can affect how easy it is for you to get a home loan. There are different waiting periods depending on the type of loan you’re applying for and the type of bankruptcy you had. In some cases, you may be eligible for a new home loan in as little as 12 months, but it’s more likely that you’ll have to wait two to four years before you can get your new mortgage. If your bankruptcy involved a foreclosure, the wait may be even longer if you owe money to the bank beyond what your home brought at public sale.

Of course, there are exemptions that you can apply for to shorten these waiting periods. Extenuating circumstances such as a death in the immediate family, a natural disaster, the loss of a job, or a major life change such as a divorce can all reduce your waiting period. Lenders see these events as unlikely to repeat, so if your bankruptcy resulted from one of these events, you may have a much shorter waiting period.

Other Considerations

One big factor in how difficult it is to get a home loan after bankruptcy is how much you can afford to put down on your home. With a large enough down payment, many lenders are willing to overlook things like bankruptcy filings even if they were only discharged within the last year. This often requires a down payment of 35% or greater; if you wait longer and work on rebuilding your credit, you may be able to significantly reduce your required down payment.

Rushing into a mortgage after a bankruptcy can cost you in other ways as well. You may need to purchase expensive mortgage insurance to protect the lender in case you default, and your interest rate will likely be much higher than it would be otherwise. There may also be increased costs or other fees associated with your loan. Be sure to shop around for your best loan offer before making your decision.