Buying a house after bankruptcy is very possible
Buying a house after bankruptcy can be a tremendous task for those who are just coming of out a financial disaster. There are many hurdles that need to be addressed concerning credit recovery. One question that seems to remain on people’s minds, is will they be able to purchase a home after filing for bankruptcy?
For most people coming out of bankruptcy the goal is to rebuild your credit score so you will qualify for a home loan at some point in the future. Although, typically it’s not possible to get a home loan right after bankruptcy you can get other loans even though you have bad credit. By following a few simple, deliberate steps, a person can recover their credit in a time span of typically two to four years, allowing for them to have the chance to purchase a new home.
Good news! Credit Scores go up and down constantly.
A person’s credit score is an important part of their life and is a very dynamic variable. This score is not permanent and can change over time due to positive work and diligent effort.
After bankruptcy, a credit score will be decimated, just like your debt but work can be started immediately to rebuild it. By using specific strategies to re-establish a credit score, the result can be almost immediate, but rebuilding your credit score can take a while and you have to be patient. A bankruptcy can stay on your credit report for up to ten years but that doesn’t mean the damaging effects linger for a full 10 years.
Is bankruptcy the best option?
The primary purpose of a bankruptcy is to lower or stop your debt accumulation, but the negative side is that it will cause reputable damage to your credit report.
The first thing to explore is the bankruptcy discharge, which must be accomplished before the process of looking for a new home can begin. The discharge achieves two things for the person who is filing.
(1) It releases the debtor, which is you, from being liable for accumulated debts that are owed.
(2) It ceases any dispute that may occur from a creditor who is trying to recover a debt by attempting to collect the debt from you.
This process is very helpful in the first step to financial recovery, but other steps will have to be made to conclude the process to its finish.
Monitor your credit constantly
One of the most important steps that one should take after filing for bankruptcy is to get back into good standing with the credit reporting agencies. The big 3 that matter are Equifax, Experian, and TransUnion. You should monitor your credit every few months from the “Big Three” credit rating agencies. This will give you the ability to monitor your credit report throughout the year. Focus on old debts that have been repaid or discharged. Creditors by law must remove these issues. Look carefully when observing your credit report for discrepancies such as:
(1) Mistakes in information that don’t match with your profile such as wrong social security numbers, addresses, or names.
(2) Wrong information due to problems associated with identity theft.
(3) Old information from a former spouse that shouldn’t be on your credit report.
(4) Outdated credit information that should have fallen off the credit report.
(5) Notations that are wrong from closed accounts.
(6) Misapplied accounts that shouldn’t be on your credit report.
When you are trying to qualify for a mortgage, you will have to show trust to your lenders that you will be able to repay your debts.
Applying for a secured credit card as soon as possible after bankruptcy goes a long way to re-establish your credit line.
Super important note: Make sure the banking institution offering the secured credit card reports to the 3 main credit bureaus. If they don’t do not use them.
Secured Card Definition
This is a credit card that is secured by your money that you give the bank. The bank will place your money in to an account and give you a credit line based on how much you gave them. The minimum amount that the bank will require is typically between two hundred to five hundred dollars. The money will be placed in a CD or Money Market account that can’t be accessed by you without a heavy penalty. They will then issue you a credit card that you can use all places that take credit cards. It can be used like a regular credit card. As a matter of fact secured cards will be converted to a regular non-secured credit card after they’ve seen your good paying habits over time.
It is a smart tip to keep your balance at thirty percent of the secured available amount. The secured card is backed by the money which is placed into the card account. If, for some reason, you aren’t able to pay the bill, then the bank will be able to pay for the debt with your funds. You must avoid this from happening because it will negate all of your work you’re doing to get your credit score up. If your credit score doesn’t go up it will be very difficult, if not impossible, to buy a house after bankruptcy.
Get an Installment Loan
An installment loan is another type of “secured” debt. A good example is auto loans. They are an excellent way of rebuilding your credit score. Non-payment of the loan will cause a forfeiture of the asset. If you can put a large down payment that will make your monthly payments lower. That may fit better in to your monthly budget. The goal here is to rebuild your credit not buy a new car and have loan payments for 5 to 7 years. This strategy works with a cheap, used car as well. Remember cars typically don’t go up in value at least not in the short term.
There is a margin that a dealership is making and the asset, in this case a vehicle, is worth less the moment you drive it off the lot. Keep that in mind that you are using this strategy as a means to bolster your credit score so you can buy a house after bankruptcy. Remember to monitor watch your credit score go up as you make payments on your secured credit card and installment loan(s).
You don’t have to keep paying on your installment loan through the entire term. You can prepay at any time and close the loan early. This will save you a lot of money in interest. You are paying the finance company interest every month. Because you just went through bankruptcy your interest rate will probably much higher then someone with a good credit score.
When your middle credit score gets back up to 720+ you should be able to qualify for the best home loan rates. At that time if you can, you should pay off your installment loans to reduce the overall interest you pay on the loan. When you pay off a loan early you reduce your interest payments because you are no longer paying monthly payment that have interest. Make sure the lender who finances your auto loan does not have any prepayment penalties.
The best way to guarantee that this will help your credit is by paying the amount that is due every month on time. If you are not able to stick with the agreements of the installment payments, you will damage your credit worse. Again making it nearly impossible to buy a house after bankruptcy.
Government Home Loans
Government-affiliated mortgage programs can offer alternate solutions to purchasing a new home after bankruptcy. Look in to FHA loans.
If Government-affiliated loans are not the option, then one might want to consider non-governmental mortgage solutions. Organizations such as The Neighborhood Assistance Corporation of America or NACA, or your bank will be able to provide information about these loans.
For Sale by Owner
You can also try a direct sale from the owner of the home bypassing the bank and other financial agencies.
Prepare to be patient and wait for a response. The FHA and the VA have the shortest amount of waiting time. Most organizations will take from two to four years after the bankruptcy discharge date to qualify for a home loan. During the waiting time, work on building your credit score and savings account.
Watch Out for Scams
Beware of scams that involve luring people into fake mortgage contracts. Such as not disclosing all of the information or allowing for loans that aren’t rational. Or they simply seem just too good to be true. Another scam is too many loan processing fees or excessive prepayment penalties. Owner occupied homes don’t allow closing costs over five percent of the loan and prepayment penalties are against the law.
No matter what type of plan you create, the best thing to do is to pay your bills on time. Stay within your financial means and do not go beyond your limit. Your payment history is one of the most important credit score is determined by your payment history. Don’t miss any payments.
Save for Down Payment
When preparing to purchase a home after bankruptcy it’s smart to create a down payment savings plan.
Typically you’ll need between 3 to 20% saved for a down payment. Always save a small amount from every paycheck. FHA loans typically have a low 3% down payment required.
Make a Monthly Budget
Whatever reason caused your bankruptcy it’s important to establish a monthly budget and stick with it. Calculate your budget and make sure that your mortgage will be within your means. Budget no more than twenty-eight percent of your income for housing expenses. Such as property taxes, insurance, utilities and other home expenses.
Try to avoid messing up the credit which you are now trying to repair. Avoid over spending. Focus on options that will fix your credit quickly such as credit cards, auto loans, and small bank loans. Do not try credit-rebuilder credit cards that have hidden fees. Look for credit cards that have no fees and keep the balance below thirty percent of the total credit line.
Bankruptcy can make life difficult especially when you are trying to purchase a new home. Following the correct steps, buying a home after bankruptcy is totally possible.