Buying a home after bankruptcy is possible as long as you prepare for your purchase beforehand.
Rebuilding Credit after Bankruptcy
One of the most important steps for buying a home after bankruptcy is to start to rebuild your credit worthiness. You will have to wait until your bankruptcy proceedings are completed before you can get back on the proper financial path. If you are diligent, you can begin to consider a home purchase 18-24 months after your bankruptcy, but there are some steps that you will have to take.
Check Your Credit
First, you will need to check your credit score to make sure that all of your debts are being addressed either by the bankruptcy settlement or through monthly payments. If the debts have been discharged through bankruptcy, you need to obtain copies of the discharge letter from the courts. If there is an account on your credit report that is not being accurately reflected, you must contact the credit agency to clarify the status of the debt.
Save Some Money
Another way to prove your creditworthiness is to start saving some money. Having some money in the bank is a sign of good faith and a sign of renewed fiscal responsibility. You also should save some money as a down payment for your new home.
Start New Lines of Credit
You should consider starting new lines of credit to reestablish your credit worthiness. There are two main ways that you can do this:
- Open a secured line of credit that you pay off each month.
- Use installment loans such as car, personal, and student loans.
As you make the regular payments on these new lines of credit, you are proving to the banks that you can be trusted to make payments each month.
Utilize Other Lines of Credit
Paying other recurring financial obligations like utility, rent, or cable bills each month can also put you on the road to restoring your credit. These types of payments also demonstrate that you are paying your bills on time.
Buying a Home after Bankruptcy
Your bankruptcy filing may show on your credit report for up to 10 years. However, if you can rebuild your credit, you can probably get a home loan within 18 to 24 months with similar terms that may have received before the bankruptcy. Using the Federal Housing Administration (FHA) may allow you to benefit from their more flexible loan policy. The FHA allows you to reestablish your credit as long as:
- Your bankruptcy filing was at least 24 months ago
- You make arrangements to pay any IRS tax lien
- Three years have passed since any foreclosure resolution
- All judgments have been paid
Once all of these steps have been taken, you can start trying to obtain a home loan. You will have some evidence that you have corrected your financial behaviors by paying your bills and showing that you can manage credit again. Using this evidence, you can demonstrate that you can be trusted to pay your bills on time.
Applying for a Loan
When you apply for the home loan, you need to take your discharge letter to the institution. You also need proof of your employment and bank statements that verify that you have some money saved.
Even after you begin repairing your credit, you may still have some difficulties the first time you try to obtain a loan for a home. Although you may qualify for the loan, the lending institutions may offer you a significantly higher interest rate than other home buyers. One way to manage this is to make a larger down payment to keep the loan amount as low as possible. You also want to make sure that there is no prepayment penalty so that you can refinance your loan at lower rates as your credit gets better.
Buying a home after bankruptcy is very possible but you must use determination and good fiscal sense.