Buying a home after bankruptcy? It’s possible!
Is it possible to buy a house after bankruptcy?
Bankruptcy proceedings can reduce or even eliminate your debt, but it will damage your credit report and credit score, which can affect your ability to get credit in the future for things like new credit cards, a car loan and a home mortgage.
It is possible to buy a home after bankruptcy, but it will take a little patience and financial planning. It’s important to regularly check your credit report to make sure that everything is there and that nothing should be. You can start rebuilding your credit using secured credit cards and installment loans, making sure all payments are made on time and in full each month.
Key points to remember
- Bankruptcy is a sad reality for many people, but that doesn’t mean you won’t be able to get a mortgage in the future.
- While your credit score is likely to take a major impact, you can rebuild your credit over time to minimize its overall impact.
- In the short term, check your credit report for anything incorrect and, if possible, try to get your bankruptcy discharge.
Understanding How To Buy A Home After Bankruptcy
First: discharge from bankruptcy
How long after bankruptcy can you buy a house? It varies. However, even to be considered for a mortgage application, bankruptcy must first be discharged. A bankruptcy discharge is an order from a bankruptcy court that releases you (the debtor) from all liability on certain debts and prohibits creditors from attempting to collect your discharged debts.
Simply put, it means you don’t have to pay off the debts and your creditors can’t try to get you to pay. Releasing your debts is just one step in the bankruptcy process. While this doesn’t necessarily signal the end of your case, it’s something lenders will want to see. The court often closes a bankruptcy case soon after discharge.
How long a bankruptcy can stay on your credit report
Check your credit report
Lenders examine your credit report, a detailed report of your credit history, to determine your creditworthiness. Although bankruptcy returns can stay on your credit report for up to 10 years, that doesn’t mean you have to wait 10 years to get a mortgage.
You can speed up the process by making sure your credit report is accurate and up to date. The check is free: Every year, you are entitled to a free credit report from each of the “big three” rating agencies: Equifax, Experian, and TransUnion.
A good strategy is to stagger your claims so that you get a credit report every four months (instead of all at once). This way you can monitor your credit report throughout the year. One of the best credit monitoring services could also come in handy in this business.
On your credit report, be sure to watch for debts that have already been paid or discharged. By law, a creditor cannot report a debt released from bankruptcy as being currently due, overdue, unpaid, with a balance owed, or converted to a new type of debt (for example, having new account numbers). If anything like this appears on your credit report, immediately contact the credit agency to dispute the error and have it corrected.
Other errors to look for:
- Information that does not belong to you due to similar names / addresses or wrong social security numbers
- Incorrect account information due to identity theft
- Information from a former spouse (which should no longer be mixed with your declaration)
- Obsolete information
- Bad ratings for closed accounts (for example, an account you closed that appears to be closed by the creditor)
- Accounts not included in your bankruptcy filing listed as part of it
You can use secured credit cards and installment loans to rebuild your credit.
Rebuild your credit
If you want to qualify for a mortgage, you will need to prove to lenders that you can be trusted to pay off your debts. After bankruptcy, your credit options can be quite limited. Two ways to start rebuilding your credit are secured credit cards and installment loans.
A secured credit card is a type of credit card backed by the money you have in a savings account, which acts as collateral for the card’s line of credit. The credit limit is based on your credit history and the amount you have deposited into the account.
If you fall behind on your payments, which you should avoid at all costs because you are trying to prove that you can pay off your debt, the creditor will dip into the savings account and lower your credit limit. Unlike most debit cards, activity on a secured credit card is reported to credit bureaus; this allows you to rebuild your credit.
Installment loans require you to make regular monthly payments that include a portion of the principal, plus interest, for a specified period. Examples of installment loans include personal loans and auto loans. Of course, it goes without saying that the only way to rebuild your credit with an installment loan is to make your payments on time and in full each month. Otherwise, you risk further damaging your credit. Before getting an installment loan, make sure that you will be able to repay the debt.
The good moment
While you may qualify for a mortgage earlier, it’s a good idea to wait two years after bankruptcy, as you’ll likely get better terms, including a better interest rate. Keep in mind that even a small difference in an interest rate can have a huge effect on your monthly payment and the total cost of your home.
For example, if you have a $ 200,000 30-year fixed rate mortgage at 4.5%, your monthly payment would be $ 1,013.37 and your interest would be $ 164,813, which would increase the cost of the house at $ 364,813. Get the same loan at 4%, and your monthly payment would drop to $ 954.83, you’d pay $ 143,739 in interest, and the total cost of the house would drop to $ 343,739, that’s over $ 21,000 in savings due to of the 0.5% variation in interest.