Many Americans fear they won’t be able to ever get a mortgage if they file bankruptcy. Others are under the mistaken impression that it would take them seven to ten years to qualify for a mortgage after filing bankruptcy. While this may have been true 20-30 years ago, nowadays this is no longer the case. Today, more mortgage lenders than ever are willing to work with people who have fallen on hard times or filed for bankruptcy. In fact, buying a home after bankruptcy can be a great way to rebuild your credit.
After your bankruptcy discharge but before you start house-hunting, follow the 4 belowÂ steps:
1) Give your credit time to rebound
Whether you filed bankruptcy because of a divorce, medical bills, job loss, or bad spending habits — put some time on the calendar between your bankruptcy and any application for a mortgage.Â As a general rule, the more time that has passed since your past financial problems, the better. It’s a smart idea to use this down-time to start saving for your down payment.
2) Fix the root of your money problems
Figure out what caused your financial problems and do what you can to make sure you don’t repeat the past. If you had to file bankruptcy because of your credit card spending, make sure you don’t get yourself into the same mess after your bankruptcy discharge. Mortgage lenders aren’t likely to help you if you appear to be repeating the same bad habits.
3) Pay your rent and any other monthly bills on time for two years
Do whatever it takes to pay your rent and other monthly bills on time for twenty-four consecutive months. If you miss a month and it’s reported to the credit bureaus, the clock starts again from zero. If your landlord or creditors don’t report your late payments to the bureaus, you’ll still be on track. Also, make sure you get a dated receipt from your landlord for every rent payment, which you can use to show a mortgage underwriter that you’re now financially responsible.
4) Try to save up as much as you can for a down payment
Be wary of no-money-down or interest-only mortgages.Â Having a solid down payment shows a mortgage lender that you’ve taken steps to save and overcome your past financial problems. A down payment will also reduce your monthly mortgage note and may save you from paying additional default insurance on your loan.
While there are some lenders who may finance a mortgage in as little as one day after your bankruptcy discharge, the interest rates offered by those lenders will usually be higher than the rate you could obtain after rebuilding your credit for two years. Therefore when buying a house after filing bankruptcy, it’s often wise to wait the two years to rebuild your credit and save for a down payment.