Declaring bankruptcy can take quite a toll on your life, as well as your credit rating. Because of this, people tend to look at bankruptcy as the end of potential home ownership.
While bankruptcy is a serious issue and should only be undertaken as a last resort, it is not the end of the world. In fact, it is the start of a whole new world where you get a second chance to rebuild your credit.
You will have to wait for some time, but you can eventually qualify for a home mortgage after a bankruptcy – and the wait may not be as long as you think. You do not necessarily have to wait for the full 7-10 year period that a bankruptcy would appear on your credit report. The length of your wait depends on what type of bankruptcy you have, how the debt is discharged, and how efficiently you rebuild your credit.
Here are the steps to take toward your new post-bankruptcy home.
- Discharge the Debt – The first step is to discharge your debt to clear the record. A Chapter 7 bankruptcy may sell your non-exempt assets to pay off your creditors to the extent possible. In a Chapter 13 bankruptcy, a payment plan is set up and you use your regular income to pay back some portion of your debt to your creditors.
The American Bankruptcy Institute reports that approximately 70% of personal bankruptcies are Chapter 7 bankruptcies. However, lenders consider Chapter 13 bankruptcy as less damaging and easier to recover from than Chapter 7.
- Rebuild Your Credit – The best way to start is with a secured credit card that limits you to the amount on deposit in a corresponding account. Use it in small amounts each month and make regular payments. Make sure that other bills are paid on time as well. Over time, your credit score will rebound.
You can also use an installment loan to rebuild your credit. Simply make your payments on time and to the correct amount. However, ensure that your installment debt is not too large for you to make your payments successfully.
Keep a close eye on your credit reports and check that there are no errors in the report that could scuttle your efforts.
- Save for a Down Payment – You will need a suitable down payment to qualify for a loan after bankruptcy, and may have a difficult time qualifying with less than 20% down. If you can get a loan, the interest rate will probably be unfavorable.
- Consider Your Options – The waiting period for loan options differs depending on the type of bankruptcy and the lender backing.
For a conventional loan, you will need to wait four years from the point of debt discharge for Chapter 7 (two years for Chapter 13 bankruptcy).
FHA and VA-backed loans require waiting two years from a Chapter 7 discharge, and require twelve months of agreed-upon plan payments without incident in the case of Chapter 13 bankruptcy. You will also need to supply a suitable explanation for the bankruptcy.
USDA loans require a two-year wait after discharging Chapter 7 debt, one year after discharging Chapter 13 debt, or one year of suitable Chapter 13 plan payments.
Remember that you still have to meet the same mortgage loan qualifications as everyone else regarding debt-to-income ratio, stable income, suitable down payments, and other qualifications.
If you don’t meet the criteria, you can look at seller financing or other non-traditional lending, but the risks are higher for both parties involved. You may have a more difficult job convincing a homeowner to finance your purchase of their home than you would with a bank.
The real key to acquiring a mortgage after bankruptcy is to show that you have gained control of your spending and any other circumstances that led you to bankruptcy in the first place. Every action you take, both positive and negative, contributes to the overall picture with the lender. Choose your actions wisely, and you can be back in your own home in a matter of a few years.