How Bankruptcy Affects Buying a Home [Buying After Bankruptcy]
If you have recently declared bankruptcy but are in the market for buying a home, the information in this document will help you understand your options.
But first let’s get some information straight with respect to current home owners that are at risk of losing their homes.
People that own a home but are at risk of losing it, may be able to save their home by filing a Chapter 13 bankruptcy.
Generally, if you have a mortgage, you must propose a plan in bankruptcy which has two parts.
The first is to continue paying the future mortgage payments.
The second is to pay the amount that are in arrears over a three to five year period.
Once the arrears are paid, you can start to seek a discharge but you will still need to pay off the balance of the mortgage.
In this way you can still keep your home but what about buying a house after a bankruptcy discharge?
Buying a new home after a discharge in bankruptcy
The main issue for most people in debt is whether they’ll be able to get a loan and the accompanying mortgage to finance the purchase of their new home.
In very rare cases like when the a person in debt inherits a fortune, they may have enough funds to buy a new home without seeking a loan.
The title company will normally double check that that the person in debt doesn’t have any other new loans.
Title insurance is normally a protection for people in debt and not the creditor’s protection – so, normally, the a person in debt should be able to address any title problems that arise.
Review your discharge
Mortgage and loan companies won’t even consider a new loan if you are still in bankruptcy and if your debts haven’t been discharged.
You should check with your lawyer to make sure you have received the formal discharge in bankruptcy.
The discharge should make clear which debts are being discharged and generally, the debts that are discharged are the ones listed on your initial bankruptcy petition.
You may also need to work with your lawyer to formally notify any courts that have judgments on record against you to remove the judgments based on the discharge. This last point is highly important.
The waiting period
In order to obtain certain types of mortgages – ones that are backed by the federal government such as Fannie-Mae and FHA loan – you may be required to wait at least one or several years even if you do hit the lottery.
Your lawyer can explain which waiting periods apply for which types of loans.
There is also a ten-year period in which the bankruptcy will be on your credit reports.
Mortgage companies may still extend you credit during the 10 year period, but they will see that you have a bankruptcy on record.
The record of the bankruptcy will be the major problem in getting a loan.
Loan companies will be worried that if you filed for bankruptcy once, that you are a risk for not paying your bills on time or even defaulting on your loans.
This is one of the main hurdles that home buyers need to overcome after declaring bankruptcy.
Work as hard as possible to improve your credit score
This is a major piece of advice. A record of a bankruptcy will immediately reduce your credit score.
Virtually all creditors, unless they’re a family member or trusted friend who knows your situation, will look at your credit score before they decide if they can give you a loan.
Likewise, most creditors will want you to give them a mortgage to secure the loan.
If you fail to pay the loan, the creditor then uses the mortgage to repossess your home and sell it.
How to improve my credit score so I can buy a house
The first step is in making every attempt to improve your credit score and you start this by examining your credit report.
People in debt that have filed a bankruptcy should be able to get a free credit report from one of the three main credit rating agencies – Equifax, Experian, and Trans Union.
It’s a good idea to review your credit reports on a monthly basis to see how your score is changing, what’s on your record, and what you need to do to improve it.
Once your bankruptcy is discharged, creditors shouldn’t report anything new against your report.
This includes failing to pay bills, having a balance due, or items like that.
The record of any judgments normally stays on your record for 7 years but some banks will provide you a mortgage after 4 or 5 years.
As mentioned, the record of your bankruptcy stays on your report for 10 years.
If your credit report doesn’t reflect your discharge or if there are new entries against you based on discharge debts, you (or your lawyer) should contact the credit agency and request that your record be cleared. This is highly important.
The credit company will likely need to see proof of the discharge in the form of a court document proving your discharge.
Make sure that all other information is correct
If items on your report are listed under a different address, or different Social Security number, that information must be corrected.
Information of a former spouse’s debts should be completely removed too.
Obtain new credit to rebuild your credit score
One of the things lenders will want to see is that you are able to pay your bills and on time.
For starters, they’ll want to be sure you have a good-paying job and that you are not incurring any new debts that you’re not paying.
They’ll also look to see if you are paying off any new loans.
It’s hard, but there are some ways to obtain credit to show you can pay any new loans.
One way is to obtain a secured credit card
This type of card is backed by the money you have in your account.
You pay your bills at the same time as you make purchases.
The money in your account secures the credit card payment.
Secured credit cards are somewhat different than debit cards.
They are special cards that some vendors may allow you to use to show you can pay your debts.
Ask your local bankruptcy lawyer to explain the difference between a secured credit card and a debit card for more information.
Installment loans are another way to build credit
A common example is when you get a car loan or a loan for appliances.
Creditors may extend these loans if you show a sufficient source of income.
In the case of car loans, if the value of the car is high enough, the creditor may extend the loan provided they keep a security interest in the car.
Your current financial situation is the major key
Home purchase lenders will generally look at a variety of factors when deciding whether to extend the loan for a home after a bankruptcy discharge.
These factors include:
- The value of the home
- The amount of your down-payment
- The length of the loan
- The interest rate on the loan
- Your current income
- Your financial risks
The longer you can wait to accumulate the funds for a higher down payment and to increase the value of your assets, and to stay out of other debt, and show you have a stable income – the better chance you will have of getting a loan for a new home after a bankruptcy discharge.
For the best results and a more professional approach speak with your bankruptcy attorney of whom will be able to properly advise yo on your options.
