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Real Estate Tips
Wednesday, September 16, 2020

Everything You Need to Know About Buying a Home After Bankruptcy

If you’ve filed for bankruptcy, many aspects of your life have probably buying a home after bankruptcychanged. You’re not alone. Thousands of Americans file for bankruptcy each year–387,721 in 2022. You may think you’ve permanently harmed your chances of buying a home, but this isn’t true. Buying a home after bankruptcy is possible! Here’s how.

Focus on Cultivating Healthy Financial Habits

You shouldn’t immediately go from filing bankruptcy to trying to get a house. Take some time to focus on getting your finances in order. Start by ordering a copy of your credit report to help you gauge where you’re at, as lenders will pull this down the road as part of the qualifying process.

Start budgeting! Some people wind up filing for bankruptcy because they don’t fully understand where their money is going until it’s too late. Now is the time to change that. Document every dollar coming into your bank account and every dollar going out. Luckily, a selection of financial apps can help with that.

Start Building Good Credit

You might think that getting a credit card will just set you up for failure when trying to build good financial habits. However, if you can budget and pay your credit card bill on time, putting some expenses on plastic will help build back your credit. Rather than using your credit card for shopping sprees, use it for your monthly bills. You’ll have to pay these expenses anyway, so you might as well build good credit while doing it.

Other ways to rebuild your credit include paying all your bills on time. That’s rent, the mortgage, student loans, auto loans…even the phone bill. Any late payments can end up on your credit report. It also helps to pay down your existing debt to show creditors you are committed to changing your financial situation.

Save, Save, Save!

No matter how small the amount, start putting away money consistently. Buying a home, even a lower-priced starter home, requires thousands of dollars. The more you can save, the better off you’ll be when putting out a down payment and closing costs.

Don’t make saving optional if you’re having difficulty exercising self-control in this area. Schedule an automatic transfer from your checking to your savings account each month. Treat it like a utility bill.

Another tactic is to have a savings goal in mind. Your goal should be based on the down payment you want to make, but other expenses involve buying a house. Closing costs alone can rack up thousands of dollars. Save extra so you have a cushion for unexpected housing costs and monthly costs associated with owning a home.

Organize Your Documents

Buying a home after bankruptcy does require more extensive documentation of your financial situation. From a lender’s perspective, you are now a high-risk borrower. The more recent the filing, the higher the risk.

Compile at least a few months of pay stubs, bank statements, tax returns, and other critical financial documents. Lenders may ask for a letter of explanation in which you detail why you filed for bankruptcy and how your situation has changed. The earlier you start saving these documents, the easier it will be when you are buying a home.

Understand Waiting Periods for Each Loan Type

Each loan program has a waiting period before applying for a mortgage. The time frame for buying a home after bankruptcy depends on what kind of bankruptcy you filed for and the loan program.

FHA Loan

  • Chapter 7 – Two years from discharge date
  • Chapter 11 – No waiting period
  • Chapter 13 – One year from discharge date

USDA Loan

  • Chapter 7 – Three years from discharge date
  • Chapter 11 – No Waiting Period
  • Chapter 13 – One year from discharge date

VA Loan

  • Chapter 7 – Two years from discharge date
  • Chapter 11 – No waiting period
  • Chapter 13 – One year from discharge date

Conventional LoanUnlike government-backed loans, conventional loans have a longer waiting requirement after bankruptcy. Remember the waiting requirements below if you want to apply for a conventional mortgage.

  • Chapter 7 – Four years from discharge date
  • Chapter 11 – Four years from discharge date
  • Chapter 13 – Two years from the discharge date or four years from the dismissal date

Compare Lenders

Finally, you don’t always need to work with the first lender you speak with. Shop around, compare, and see who can offer a loan that’s best for your situation. The best lenders will walk you through the different types of loans and all your options, keeping your current finances in mind.

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Preston Guyton

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