Considering Home Ownership After Bankruptcy
Declaring bankruptcy is never an easy decision. In addition to the short-term impacts on your credit report, feelings of discouragement and guilt can often accompany that difficult financial situation. A bankruptcy listing on a financial report can make some people feel like they may never again achieve financial stability and normalcy. It can feel like the financial goals they once had are out of reach.
Bankruptcy shouldn’t be seen as a stigma or a situation that can’t be overcome. Despite the temporary damage to your credit score and the fees and penalties you must pay (also known as bankruptcy damages), bankruptcy does not leave a permanent mark on your credit report.
Although bankruptcy damages your credit score in the short term, proceedings can still eliminate your debts—or at least reduce them. With proper planning and sound financial habits, it’s even possible for you to buy a home after bankruptcy. At Mortgage MD, we are committed to seeing you own your own home.
To help you achieve your dream, we have drafted this article to give you a better understanding of how to buy a home after bankruptcy.
How Soon After Bankruptcy Can You Buy Your Dream House?
When you declare bankruptcy, the impacts on your credit will certainly be felt. However, with patience and a bit of financial planning, you will be able to buy a house after bankruptcy. Depending on your down payment and the nature of your bankruptcy, you will be eligible to purchase a home as soon as your bankruptcy has been discharged.
With a minimum 20% down payment, for example, you would be able to obtain a loan soon after the judge discharges your record of bankruptcy. If you choose to purchase a home with less than 20% down, however, you will need to wait 2 years and have re-established your credit.
As part of preparing for the application process, we recommend that you check your credit report and credit score consistently. This review will help to ensure that your bankruptcy has been discharged appropriately and that payments are reflected in your improved credit score.
How To Buy A House After Bankruptcy
- Bankruptcy Discharge
The first step before you consider applying for a mortgage is to make sure your bankruptcy has been discharged. Your bankruptcy is discharged when an order is issued from a bankruptcy court.
This order frees you from any liability on debts and forbids creditors from making any attempt to collect on your discharged debts. In most cases, after a period of time, the court closes bankruptcy cases after the discharge. After the case is closed, you can then apply for a mortgage
- Check Your Credit Report
To establish your creditworthiness, all lenders will first review your credit report. Although bankruptcies can appear on your credit report for seven years, that does not necessarily mean that you have to wait that long to secure a mortgage.
To speed up the process of getting a mortgage, we recommend that you monitor your credit report to ensure it is always accurate and current. Check on your credit report periodically to make sure that any repaid debts are not appearing on the report.
Under bankruptcy law, no creditor can report any debt discharged in bankruptcy as being currently outstanding, late, owed, converted as some new type of debt, or as having a balance due.
If you notice any of these outstanding debts listed on your credit report in error, we recommend that you get in touch with your credit agency immediately.
Other Common Errors To Look For
A) Inaccurate or wrong account information
B) Fraudulent charges due to identity theft
C) Incorrect information that has been confused with similar information of another individual (e.g., name, home address, social security numbers, etc.)
D) Listings of any accounts that were not included in your bankruptcy filing.
- Repair Your Credit
As part of securing a mortgage, you must be able to prove to the lender that you can be relied on to repay your debt. After a bankruptcy, your credit options become significantly limited. However, you can work towards rebuilding your credit with the help of secured credit cards and installment loans. A secured credit card is supported by the money you have in your savings account which acts as collateral for the card’s credit line.
- Write A Letter Explaining Your Bankruptcy
When you apply for a mortgage, all lenders will take a close look at your finances. A record of bankruptcy is definitely a red flag, but you can boost your chances of securing a mortgage by writing a letter of explanation to your potential mortgage lender.
This letter will provide more detail and rationale concerning why you declared bankruptcy. We recommend that you include details on the circumstances that led to your bankruptcy filing and how your financial status has changed since.
Although a letter of explanation is not mandatory, we recommend it as a way to help your lender better understand your situation.
Bankruptcy Isn’t A Life Sentence
At Mortgage MD, we are committed to showing you the potential of securing a mortgage after bankruptcy. We understand that declaring bankruptcy can feel overwhelming and as though the options for your financial future are limited.
Although there are different types of mortgages for ex-bankruptcy that you need to consider before applying, remember that it’s not impossible to secure a loan after a previous declaration of bankruptcy.