Bankruptcy is not a permanent black mark on your credit report. You can even think about buying a house after bankruptcy. In the following article we will guide you on how to achieve this.
At Ortiz y Ortiz our bankruptcy lawyers in New York City have a combined experience of over 30 years. We can help and guide you in knowing how to buy your home after bankruptcy.
Buying a house in 2022 After Bankruptcy Step by Step
Although the negative impact on your credit remains with you for up to 10 years after bankruptcy, you should not put your life on hold. With the right strategy, you can even qualify for a mortgage. With this you can get a new home.
In this article we have focused on buying a house after bankruptcy. If you want to learn more about mortgages, check out our article “Home refinance after bankruptcy“. There we talk about the different types of loans and mortgages that you can get.
Now, let’s take a look at some information and steps to consider when buying a house after bankruptcy.
Bankruptcy must be discharged for you to be eligible for a home loan application.
Although debt discharge does not necessarily indicate the end of your case, it is something that lenders want to see. Oftentimes the court closes a bankruptcy case shortly after the debt is discharged.
Note: Wondering how to find out all your debts?. Check our guide.
2. Set a date
The first thing to think about is when you want to make the purchase. Ideally, you will need 1 or 2 years with the following goal:
- Build credit;
- Prepare financially for loan approval.
Although you may qualify for a mortgage sooner, it is recommended that you wait 2 years after bankruptcy – you will likely get better terms and a better interest rate.
Note: A small difference in interest rate can have a big effect on your monthly payment and the total cost of your home.
In case you have to move out sooner
Filing for bankruptcy can put an automatic stay on the automatic foreclosure of your home. In such a case, you should sell the property and reduce its size.
Instead of immediately looking for a new mortgage, it may be better to rent for a few years to prepare for the future purchase.
3. Review and repair your credit
After bankruptcy your credit profile can contain both correct and incorrect negative elements. To complete bankruptcy, you must eliminate all remaining debt balances, zero balances, and have collections accounts closed.
Be sure to check your credit report to make sure it was updated correctly when completing your bankruptcy debt discharge. You may need to go through the credit repair program if you find items that need to be removed or updated.
Note: You are entitled to a free credit report from each of the “big three” credit rating agencies: Equifax, Experian and Transunion.
Items and Possible Errors to Look for on Your Credit Report
- Make sure you can see debts that have already been paid or discharged.
- Check that there is no information that is not yours due to similar names and addresses or wrong social security numbers.
- Information from a former spouse that should no longer be mixed up on your report.
- Incorrect account information due to identity theft.
- Out of date data.
- Accounts not included in your bankruptcy filing listed as part of it.
- Incorrect entries for closed accounts.
Note: You might be interested in learning how does filing for bankruptcy affect your spouse.
4. Take action to rebuild your credit
- Get a secured credit card. This will allow you to get credit with a deposit and your credit score will not be a determining factor in qualifying;
- Manage charges strategically. Every positive payment you make will help you build credit;
- Keep your balance at no more than 20% of your total credit line;
- Make sure to keep up with any other debt payments.
Note: These are steps you can take after bankruptcy to rebuild your credit. These will offset the negative information on your credit score before the bankruptcy penalty expires. Our section “How to raise your credit score fast” can help you achieve your goal.
5. Start saving by setting a budget
A stable financial situation will be key to ending bankruptcy and getting approved for the mortgage refinance after bankruptcy. You will need to create a formal budget to be successful, and it’s not as complicated as you think:
- Find a budgeting platform that makes this easy for you;
- Enter your bills and categorize your expenses.
You will need as much money as you can save for the down payment in the next 12 to 24 months.
6. Write a letter of explanation
Although this is an optional step, lenders make money by making loans. It stands to reason that whatever context you can provide will go a long way in getting your approval.
Write and submit a letter with your mortgage application. This letter should explain the circumstances surrounding your bankruptcy. Detail underlying problems that led to bankruptcy and how you resolved them. Clearly state what you have done to avoid experiencing the same situation in the future.
You can also keep your car If you file for bankruptcy, we tell you how to on our website.
7. Get pre-approved
As soon as the waiting period is over, your finances are in order, and you take steps to restore your credit, you can start the pre-approval process. This approval will give you a better idea of what you can afford.
As soon as you receive a pre-approval letter, you can attach it to any offer you make for a house. This letter indicates two things:
- The lender considers you creditworthy;
- You show the seller that you are serious about their offer.
You will need to submit the following documents:
- Form W-2.
- Your recent pay stubs.
- Bank statements.
- Be completely honest about past difficulties. These will be exposed anyway early in the process.
8. Be responsive and available to serve lenders
- Your lender will most likely need additional information about you and other applicants;
- Be easy to contact and respond as quickly as possible;
- Be transparent about your past and present finances.
All of this will speed up your application process and earn you points for your application.
9. Maximize your down payment
The more money you have for your down payment, the better. It will be easier for you to qualify for the mortgage you want and therefore, buying a house after bankruptcy will be an easier goal.
At a minimum, you should have 20% of the purchase price of the home. So you can opt for a traditional mortgage instead of relying on riskier options like adjustable rate mortgages (ARMs).
Note: Although you can qualify for an FHA loan for as little as 3%, aim for the 20% mentioned above. In this way, it will always be easier for you to obtain the desired mortgage.
10. Your Desired Target Price Range
After 12 to 24 months of hard work, you are ready and know much more on buying a house after bankruptcy. Therefore, the purchase process begins. Take into account the following aspects to define what you need in your home.
- How much can you afford?
- Where do you want to live?
- What characteristics are essential in my house?
Note: Use a mortgage calculator to find out how much mortgage you can get without having to make monthly payments. With this you can establish a more correct target price range.
11. Check Your Credit Score
This is the last step you need to take to figure out how to buy your home after bankruptcy.
Check your credit score as follows:
- You can purchase one of the credit score reports through a credit bureau.
- Enroll in a credit monitoring service at one or all three agencies..
How long after bankruptcy can you buy a house
The answer depends on the type of bankruptcy you have on your record and the type of loan you want to obtain. Here are the waiting periods to obtain a loan.
- You must wait at least 4 years after the court annuls or dismisses your bankruptcy to qualify for a conventional loan.
- You will have to wait 3 years to get a USDA loan.
- It will be 2 years for government-backed mortgages. Like for example those of the FHA.
Note: This article assumes your knowledge of Chapter 7 bankruptcy. You can read a complete guide in our “Filing for bankruptcy Chapter 7” section.
- One day after your bankruptcy discharge date, you may qualify for a refinance if you have a government-backed VA loan.
- For a conventional mortgage loan, the waiting period will be 2 years.
Note: This article assumes your knowledge of Chapter 13, otherwise please review our guide “Filing for bankruptcy Chapter 13”. You can also discover all the differences from bankruptcy Chapter 7 vs 13.
Be aware of additional fees and expenses
Fees for inspections, appraisals, title processing, and escrow needs can add up quickly.
These fees can be built into your loan or added to your initial expenses. Keep in mind that when combined with your loan, these costs affect the monthly payment and the total interest you pay over the life of the loan.
Be sure to factor in these expenses for your future goals. You will have worked hard to rebuild your credit and with the goal in mind of buying a house after bankruptcy.
How to Get a Favorable Interest Rate Mortgage
Being a risk for lenders, most will charge you higher interest rates. Here are tips for maximizing your interest rate savings and buying a house after bankruptcy in a timely manner.
Try to get an FHA mortgage
If you qualify for an FHA loan, it may be your best option for affordable and manageable home financing.
The FHA allows bad credit buyers to obtain financing with a small down payment and a reasonable interest rate.
Note: You will have to pay an additional fee for mortgage insurance for at least eleven years.
Buy a Seller Financed Home
There are real estate investors who buy houses that have gone up for auction or have been foreclosed on back taxes. As a general rule, they will get them at a very good price and sell them quickly.
Some will sell these houses just as they were, that is, without a credit check and with 0% interest.
This is one way of buying a house after bankruptcy, even with bad credit.
Accepting a high rate and refinancing later
If you are really determined to buy a home now despite the recent bankruptcy, you may be willing to accept a high interest rate.
If you improve your credit after you buy the house, you will likely be able to refinance at a more competitive rate in the future.
- This option carries risks since you cannot predict what interest rates will be like in the future.
- Future rates may still be in line with what you are currently paying.
- When refinancing a mortgage, there are costs and fees associated with closing that can wipe out your savings.
Note: For this option to be viable, you should refinance at least at a 1% lower interest than you currently have.
Consider a Rent-to-own Agreement
- With a rental contract with the option to buy, you rent the house you are interested in buying for a period of 3 to 5 years.
- During this time the rent will be $ 100 or $ 200 more expensive than if you were renting.
- This extra money is reserved to be used in the initial payment of the house as soon as the agreed time elapses.
The key here is to rebuild your credit during this time to be a better candidate for a competitively priced mortgage. A substantial down payment will also improve your image towards the mortgage lender.
Note: The risk in this case will be that if you decide not to buy the house later, you will lose the money you put in for the down payment.
Talk to financial experts to get everything under control
At Ortiz & Ortiz we have helped hundreds of clients over the last 30 years. With offices in Astoria, Brooklyn and Manhattan, we can guide you from filing for bankruptcy in New York to dealing with the consequences of bankruptcy.
If you want to know how to buy a home after bankruptcy, you are in the right place. Tell us about your case so we can help you.
Calling us does not commit you to anything and can be the first big step towards improving your financial situation and obtaining your new home.