Buying a home after bankruptcy is difficult after filing Chapter 7 or Chapter13 bankruptcy . However, it’s not impossible, even if it is hard to get a real estate loan.
Bankruptcy and Your Credit
First, you need to face the realities of the effects that bankruptcy will have on your credit and your ability to buy a house. No matter how much work you do to build up your credit, you’ll still be paying a higher interest rate than a borrower with good credit. The bankruptcy will show up on your credit report for 7 to 10 years. You’ll need to concentrate on the other factors that determine whether or not a lender will fund a real estate loan: your income and your down payment.
Rebuilding Your Credit
Wait at least two years after a bankruptcy to start looking for a home loan. This will allow you to start re-establishing your credit and build up your savings so you can pay a significant down payment. Start to build your credit by looking for some small balance credit cards. These are normally heavily marketed to people with poor credit, so look for offers in your mail after you file, or search online. These credit cards have small balance limits of $200 to $300. They also have slightly higher interest rates than normal.
Although it seems unusual that you should take out more credit cards after filing for bankruptcy, these credit cards serve a purpose. You will be using them to prove your credit worthiness. Don’t use these credit cards as an excuse to go shopping for fun. Choose one monthly expense, like your gas or grocery bill, and pay using a credit card. Keep track of your balance, and then pay it off each and every month. This way you’ll be building up a positive credit report with regular payments.
Work on reducing your other expenses so that you can put as much money as possible into savings. The common recommendation for your down payment is at least 10 percent of the total cost of your home. Since you have a bankruptcy on your record, you may want to save a 15 to 20 percent down payment. If you can pay 20 percent for your down payment, you’ll be better off since you won’t need private mortgage insurance (PMI) or a piggyback loan to cover any loan over 80 percent of the cost of the home.
With planning and prudent financial management, you can overcome having a bankruptcy on your record. If you put this bankruptcy advice to good use, owning your own home is not too far out of your reach.