Home Loans After Bankruptcy: 4 Key Facts You Need To Consider

home loans after bankruptcy

4 Ways to Get Home Loans After Bankruptcy

Facing bankruptcy? Uncertain about your financial future? Wondering if it’s even possible to find home loans after bankruptcy? Puzzled about how long do you have to wait to buy a house after chapter 7?

It might seem like the end of the world but did you know you can still get a home loan after filing for bankruptcy?

house on top of calculator

The number of bankruptcy filings is declining each year. Still, there are a lot of individual Americans who declare bankruptcy.

Don’t fret; bankruptcy is not a punishment. Rather, it’s a way to start over and for you to be more mindful of your financial state.

However, you can’t deny its effects on your credit score and your ability to apply for loans. You can still get loans via some other ways, but these come with exorbitant interest rates.

Applying for home loans after bankruptcy is going to be hard but not impossible. Keep in mind the following steps to get your credit back on track after bankruptcy and get a mortgage with low-interest rates.

Re-establish Your Credit Before Getting a Mortgage

Before you consider buying a house after chapter 7 and foreclosure, figure out first where you now stand financially. You can get a free credit report from Equifax, TransUnion, and Experian.

There will be some debts discharged from your credit report after bankruptcy. Still, check if there’s any debt that you’ve paid for but still showing up. You might also spot some other mistakes while scrutinizing your credit report.

As a result, you can easily have them corrected by contacting the respective credit agency. In addition, you can usually file a dispute on their website.

Make sure you also use your credit lines and pay the remaining debts to improve your credit score. Do note that this takes time. You may have to wait for at least 12 months after bankruptcy before you see any real improvements.

Another way of rebuilding your credit is by making on-time monthly payments. If you still have debts, you can show you’re a good payer by never missing a payment.

If you don’t have anything to pay every month, however, consider getting a secured credit card.

Get Secured Credit Cards and Make Payments on Time

Banks and mortgage companies that deal with bankruptcies look at your credit report to see if you can make monthly payments. One way for your report to reflect on-time payments is to get a secured credit card.

Treat it as cash. Meaning, don’t buy items with it that you wouldn’t have bought with cash. You can also use the credit card to pay bills or buy food, which are items you’ll need to pay anyway.

women applying for secure credit card with dog

But do note that a secured credit card may not be good enough for your credit score. It’s only a stepping stone to get you started on rebuilding your score to qualify for home loans after bankruptcy. You will eventually have to move on from a secured credit card to a consumer credit card.

Getting a loan, which will also charge you monthly, may work for you as well. But keep in mind that it’s an unsecured debt, and it’s generally inadvisable to make inquiries for such because they will show up on your credit file.

However, if you are confident that you can make monthly payments, go for it. Personal loans and student loans can still rebuild your credit after bankruptcy. Those who are under Chapter 7 bankruptcy protection will also find it easier to get a car loan.

When you do get a secured credit card, a loan, or both, make sure you pay the monthly dues on time.

Save as Much as You Can for the Down Payment

After a bankruptcy discharge, you should give yourself a little breathing room to start saving some money every month before looking at home loans. This is the best time to make a habit of setting aside any amount, even if that’s $10, as soon as you get your paycheck.

Take advantage of bank programs that automatically transfers a pre-determined amount of cash from your checking account to your savings account. This will force you to save first before spending only what’s left.

Get out the calculator and start crunching some numbers to see how much you can save each month. Afterward, set a goal of how much you want to put down for the deposit.

You should aim to pay the biggest down payment you can save. The ideal amount of down payment on a home loan is 20%, which will lower your monthly payments and give you equity.

You can get home loans after bankruptcy for as little as 5% deposit, but you’ll have to pay mortgage insurance. The lender will also charge you higher monthly premiums. In the end, you’ll be paying the same amount each month to the bank as someone who put down 20% but with the added cost of the insurance premium.

Consider Waiting Before You Shop for Home Loans After Bankruptcy

You will see significant improvements on your credit score in as soon as 12 months. You may then choose to see if you can qualify for a mortgage after chapter 7 discharge.

Check your FICO score online. A score above 700 is excellent, but most people coming out of bankruptcy won’t reach this fast. You’re good, though, as long as you reach a score of 620 and above.

You can also use FICO’s calculator to determine the best time to get a mortgage based on your credit score.

man looking a watch and waiting

The best thing to do, however, is to wait two years after bankruptcy before getting a mortgage. Your credit score will be good enough to get you the best rates.

One way to go is to apply for an FHA loan. Getting an FHA loan after chapter 7 discharge is doable, but you will have to wait the required two year period.  Under the FHA guidelines, there are exceptions to the waiting period for “extenuating  circumstances” caused by loss of income from unemployment that were beyond the homeowners control.

To qualify you’ll have to meet FHA loan income requirements, as well as the required FHA loan credit score, but they are less stringent than with conventional loans.

A two-year wait isn’t that much when you compare it to the mortgage term, which is usually 30 years. So, if you’re serious about getting back on your feet after filing bankruptcy, consider waiting before you apply for any home loans. It will save you more in monthly payments, and you will have bigger savings by then.

You can also get home loans after bankruptcy in under 12 months but expect higher interest rates. This gives you the risk of missing monthly payment, which will further ruin your credit score.

Get More Financial Insights

Bankruptcy can make people’s dreams of owning a home vanish into thin air. That doesn’t have to be the case. You can still find home loans after facing the bottom of the barrel.

If you need help on making the best financial decisions, we can give you all the information you need. Visit us now and learn about other financial options, like getting a credit card even when you have a bad credit score!

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6 Comments

  1. Thanks Patrick,

    As a finance major in college, I’m well aware of the disastrous effect declaring bankruptcy can have on a person’s credit score.

    It is nice to see someone provide hope to these people.

    Most of us have been foolish at some point in our lives with overextending. When this is accompanied by a job loss or some other unplanned occurrence, bankruptcy may be the only logical choice.

    These are excellent recommendations you have offered.

    When starting over, you are basically 18 again trying to build up your credit score.

    Buy things on credit you know you can pay in full and slowly get there. 2 years really isn’t that long to wait before purchasing a home given typical life spans.

    • Sometimes the forces of the universe are against us.

      I know several people that have declared bankruptcy and have still come out fine on the other end.  It’s a way to start over and it provides a sober assessment on why you should never overextend.

      Home loans are possible after bankruptcy, but it can be a long road back.  Those that have gone through bankruptcy need to pay special attention to how they manage there finances.

      Once they have things under control and with a little time, home-ownership can be a possibility.

      I like your analogy that you are basically 18 again and starting over. If you think back, those were fun and challenging times.  It’s possible to have fun again, you just have to show a little discipline.

      All the best.

  2. Bankruptcy is such a scary thing and a hole that seems impossible to crawl out of.

    These are very practical tips for those that are struggling and provides some light at the end of the tunnel.

    I gives people that are down on their luck hope that one day they can get back to owning a home and experience a stable home life.

    Keep the tips coming, they are eye opening and encouraging!

    • Your words are so true.

      It’s tough to go through bankruptcy and try to rebuild your life again. However, if one is patient and does all the right things, recovery is just around the corner.

      The best way to go is wait two years after bankruptcy then apply for an FHA loan.  FHA guidelines are less stringent than conventional loans and have exceptions for extenuating circumstances.

      Generally if you have had loss of income from unemployment that is beyond your control, FHA makes exceptions for these types of scenarios.

      Thanks for commenting on the post.  Check back often for future articles and tips.

  3. I really found your post very informative.

    Your explanation, about home loans after bankruptcy is easy to read.  

    But your right their are too many people getting scammed by some of these companies and people who do not do their research on them end up getting hurt and in a worse situation.

    I know what it`s like to fall prey to them personally, as I had a bad experience once.

    Thanks for the great information.

    • He Dianne,

      Thanks for your comment. Happy to hear you enjoyed the post.

      Finding home loans after bankruptcy isn’t easy, but if you follow the tips in the post you can realize your dream of owning a house again.

      One of the best things you can do is to be patient, as the passage of time will cure most of the negative things that have happened in the past.

      Follow the steps to reestablish your credit and find a secured credit card and make the payments on time every time.

      Also monitor your credit score for improvements and keep saving, so when it’s time you will have enough to put down a hefty down payment.

      I like your point about people needing to be careful about dealing with shady companies.  It’s a good idea to do your research and make sure you are using a reputable company if you decide to get outside help.

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