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 There is no doubt that filing for bankruptcy can have a devastating impact on your ability to borrow money - especially in the months and, sometimes years, immediately following a bankruptcy filing and settlement. But buying a home after bankruptcy in as few as 18 to 24 months is possible if you know what steps to take to start rebuilding your creditworthiness.
If you're presently in a bankruptcy proceeding, then you're probably going to have to wait until your case has been decided. No one's going to extend credit to someone when they're in this situation. Besides, you probably need to spend some time getting your finances in order before thinking about borrowing money, especially when it comes to a large investment such as buying a home.
Credit Ratings After Bankruptcy
After a bankruptcy settlement, or discharge - whether it is a Chapter 7 or Chapter 13 - there is no doubt that your credit rating will be poor or perhaps even at a low point. In fact, one could reasonably argue that in the months prior to your bankruptcy filing your credit score was probably already declining and borrowing was more difficult.
But if we step back and turn the negative of the bankruptcy into a positive, you've hopefully accomplished two things:
- You've learned from the experience and, with any luck, have gotten your personal or household finances in order.
- The bankruptcy has settled a lot of unknowns. You know exactly where you stand - what money you owe creditors and which debts have been discharged.
So what's the good news? If you believe that bankruptcy is a low point for you financially and your credit score, then you've only got one place to go - and that is up. So the next logical question is how to go about rebuilding your credit score so that buying a home after bankruptcy becomes a reality?
Rebuilding Credit Scores After Bankruptcy
Buying a home is a pretty big investment in anyone from a lender's standpoint. If you want to be trusted with a home loan, then you need to prove to lenders that your financial troubles are behind you. So let's discuss some of the steps you can take to help start rebuilding your credit scores as quickly and efficiently as possible. This way the time you're waiting until you once again qualify for a mortgage is as short as possible.
Cleaning Up Your Credit Report
After bankruptcy you should know exactly where you stand with respect to creditors - who still has to be repaid and what obligations no longer exist. While it may take the credit reporting agencies some time to catch up, you need to make sure that your credit report accurately reflects the outcome of your bankruptcy proceeding.
For example, if an account still shows as open and overdue when it shouldn't be, then you need to contact the credit bureau and prove to them that those accounts should be "included in bankruptcy."
While you're at it, you should check for other mistakes on your credit report and have those corrected as well. You're entitled to a free credit report from each of the credit rating agencies each year. And the Fair Credit Reporting Act provides you with a clear process for having the errors on your report corrected.
Once you're certain that your credit report is clean of errors, it's time to start rebuilding your credit score.
Secured Credit Cards and Installment Loans
The fastest way to start rebuilding your credit score after a bankruptcy is to prove to creditors and other lenders that you can be trusted to pay back the money you owe them. There are two ways you can do this before you want to start talking about buying a home and applying for a mortgage - secured credit cards and installment loans.
- Secured Credit Cards - If you've recently come out of bankruptcy you might find it hard to get an unsecured credit card. A secured credit card gives you credit that's limited to an amount you've got on deposit with the issuing bank. So if you've got $200 - $500 to place in an account with the issuing bank, then they will limit your credit each month to the amount of that deposit.
- Installment Loans - This can include personal loans, car loans, student loans and mortgages. An installment loan is simply one where you make "installment" payments each month. If you get an installment loan, you only need to do one thing - make your monthly payments on time.
With both of these approaches you might have to think small at first. Remember, before anyone's going to trust you with the kind of loan you'll need to buy a home, you're going to have to prove to them that you can be trusted to pay back smaller amounts - especially after a bankruptcy.
You'll also want to adopt a responsible approach to credit such as using only a small portion of your available credit and not applying for too much credit at once. This leads us to the next logical question - what's a reasonable amount of time after filing bankruptcy before you might be thinking about buying a home?
Home Loans After Bankruptcy
A credit reporting agency is within their legal rights to show the bankruptcy on your credit report for up to ten years. But that doesn't mean you need to wait ten years before buying a new home. In fact, by adopting the steps we've previously outlined you can immediately start rebuilding your credit score.
Some studies have found that in only 18 to24 months after a bankruptcy, debtors can qualify for a loan on the same terms as if they had not filed bankruptcy. In fact, the Federal Housing Administration's policy for qualifying for a home loan is even more flexible than some conventional mortgage lenders.
The FHA allows you to re-establish credit if:
- Twenty four months have passed since the bankruptcy has been discharged.
- Any outstanding tax liens have been paid or the appropriate arrangements have been made via a repayment plan on file with the IRS or Department of Revenue.
- Three years have passed since a foreclosure or a deed-in-lieu has been resolved.
- All judgments have been paid.
Bankruptcy and Interest Rates
Finally, you need to keep things in perspective when applying for your first home loan after a bankruptcy. While you might qualify for a loan, the interest rate on a home loan or even a car loan might be relatively high when compared to lower interest rates being offered to the rest of the marketplace.
Don't be discouraged by offers of high interest rates. Make large down payments to keep the loan small and make sure that loan does not impose a prepayment penalty. This allows you to refinance your car or your home loan at lower interest rates as your credit rating improves.
About the Author - Buying a Home After Bankruptcy
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