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Buying a Home after Bankruptcy

By Stevie Duffin-Lutgen Updated on 8/1/2013

BankruptcyIn the face of bankruptcy, buying a home may seem like an impossible endeavor. Many people believe that low credit scores prevent them from ever qualifying for a mortgage loan in the future. Although buying a home after bankruptcy is not without challenges, qualifying for a mortgage loan is still possible.

The good news is that banks and home mortgage lenders do not just look at your credit score when they evaluate your application. They already know you are short in this aspect, because your bankruptcy will show on your credit report. When attempting to acquire a home loan to buy a house after bankruptcy, lenders are looking for several other things besides credit score: income verification, re-established credit, and the ability of the prospective borrower to make a down payment.

How can I recover from bankruptcy to buy a home?

Although your credit score will take a substantial hit after you declare bankruptcy, many other factors come into play when banks and mortgage lenders consider whether a borrower qualifies for a loan. Primarily, borrowers will must undergo a waiting period after bankruptcy to get a new home loan. Below is a list of companies that can help you either secure a mortgage or repair your credit after bankruptcy:

How long do I have to wait after a Bankruptcy to get a new mortgage?

Depending on the loan type and size, borrowers may need to wait several years before being eligible for a new home purchase loan. The table below shows the typical “waiting periods” for various loan types:

 Chapter 7 BankruptcyChapter 13 Bankruptcy
Conventional Loans4 years
2 years (w/ extenuating circumstances)
2 years (from discharge)
or
4 years (from dismissal)
FHA Loans2 years
1- 2 years (w/ extenuating circumstances)
12 months on-time payments 
 
USDA Loans3 years
< 3 years (w/ extenuating circumstances)
12 months on-time payments
or
1 years (from discharge)
VA Loans2 years
1-2 years (w/ extenuating circumstances)
12 months on-time payments 
 

 

Below is a list of companies that can help you secure a mortgage loan or repair your credit after bankruptcy:

 

What do I do during the waiting period after bankruptcy?

In order to buy a home after bankruptcy, lenders will look closely at your post-bankruptcy credit history. However, if you have made some smart decisions and established responsible new debt, you should be able to acquire a loan.

Re-establishing good credit is one of the most important goals you should make for yourself during the waiting period. Even though you may get to the point where you have waited the mandated amount of time, if you have made further late payments since the bankruptcy or perhaps not re-established any new debt, being approved for a mortgage will be difficult. You must be actively involved in re-building good credit after a bankruptcy.

Though filing for bankruptcy is not the ideal situation to be in, it is an opportunity for a fresh start. Believing and practicing this idea is the best way to show a lender you are ready for another chance. After a bankruptcy, the most important steps to take are re-establishing your credit and, in doing so, proving your reliability.

How can I re-establish my credit?

Rebuilding your credit is actually quite simple. To start, take a look at why you ended up filing for bankruptcy in the first place. If you were unable to make payments on time, you will need to find the root of this problem and correct it before starting anew. The worst possible course of action following a bankruptcy would be to repeat the same mistakes and tarnish your credit a second time.

  • Make sure that your credit report is current

After a bankruptcy, you need to verify that your accounts and credit reflect your current situation. If anything is not up to date or if you notice any errors on your credit, make sure to resolve these issues before you start trying to rebuild your credit. Obtain your credit report and make certain that all accounts that were included in your bankruptcy are reporting this way. 

  • Apply for a credit card

Applying for a credit card will help you to establish a new credit history and prove to a lender that you can manage your finances responsibly. Getting a secured credit card can help even more as it restricts your spending to the amount on deposit in your bank account.

  • Installment loans

While you recover from bankruptcy, installment loans can help you to recover your credit score while you are unable to seek traditional loans. These loans are paid back in monthly installments.

  • Make payments on time!

It is vitally important to make your payments on time after filing for bankruptcy. Since you already have a history with bankruptcy, additional late payments will greatly diminish your chances to secure a loan. Not to mention, you could put yourself deeper in debt by missing payment deadlines.

What do I do after I have established credit?

  • Prove your income with steady employment

If you are able to prove that you’ve become more responsible in managing your finances, your chances of buying a home will significantly increase. Having steady income and a two year employment record is the best way to demonstrate that you are responsible and capable of making the most of a second chance.

  • Save for a down payment

While you manage your income, you should save money to put toward a down payment.Aiming to put 10 percent down will improve your chances with a lender when the time comes to secure a mortgage, although there are loans available after bankruptcy that allow for a smaller down payment.

How can I raise my down payment?

  • Down payment assistance programs

Each state offers various Down Payment Assistance programs. Research the available programs in your state. If you are planning to buy a home in a rural area, the USDA offers a loan program with a zero percent down option.  

  • Gifts from Family

Your family is allowed to give your gifts towards your down payment. If you have several siblings, even small financial gifts can add up.

  • Withdraw funds from a 401k

If you are unable to save as much as desired for a down payment, consider cashing out a 401K or other investment. You can repay yourself later with a second or third mortgage (home equity loan/home equity line of credit) once the mortgage loan has closed. You should always consult a financial advisor when making important decisions about your financial future.

Where should I look for a lender post-bankruptcy?

When applying for a loan, post-bankruptcy or otherwise, it is always a good idea todiscuss your prior bankruptcy or credit problems up front with a loan officer so that he/she can fully understand your scenario to find the right loan. Have a discussion first, before having your credit report run. For borrowers that have filed for bankruptcy or undergone a similar dent in credit score, lenders will offer loans with slightly higher interest rates than to borrowers with impeccable credit. This is why you want to strive to increase your credit score by following our advice on re-establishing good credit.

About The Author:
Stevie Duffin-Lutgen
Stevie Lutgen is the Senior Editor at Lender411. She manages the site's Authorship Program and social media pages. Stevie graduated from UC Santa Barbara with a BS. Contact her: stevie@lender411com.

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