Buying a Home After Bankruptcy – What Do You Need to Know? If you've filed for Chapter 7 or Chapter 13 bankruptcy in the recent past, you may feel like you'll never get your finances back on track and never get to purchase a home. While bankruptcy is serious business, there is hope for owning a home again! Bankruptcy fillings have become more common in recent years due to the recession, so don’t feel like you're the only person with a bankruptcy on their record to walk into a lender's office and ask for a home loan. If you want that trip to be successful, though, follow this advice:
1. Be patient
Financial experts say you need to wait two years after the discharge date of your bankruptcy before applying for a mortgage. (If you're still in process of filing for bankruptcy or a credit counseling agency is still handling your finances, you haven’t been discharged yet.) You may be able to get a mortgage sooner than that, but the rates and terms won't be very good.
2. Fix your credit
After a bankruptcy, your credit score will be at an all-time low. Since you need to wait two years before a lender will give you a decent interest rate on a mortgage, why not use that time to your advantage? You won’t be able to get any major credit cards after a bankruptcy, but there is a way you can prove to lenders that you deserve a second chance – secured credit cards. These cards come with a credit limit that’s equal to the amount you deposit onto them. Also, make sure you pay all installment loans – like your car payments and student loans – on time, as each of these are reported to the credit bureaus. That way, you’ll prove that you can be trusted to pay back any money you’re lent in the future. It won't happen overnight, but eventually, your credit score will start to rise.
3. Don't max out your credit
Chances are you had to file for bankruptcy because you got in over your head with debt and could no longer make the minimum payment for all of your debts. So, don't make the same mistake twice! If a lender grants you a credit account, don't max out the card. By having credit available every month, you can show potential lenders that you know how to live within your means.
4. Fix any credit report errors
The last thing you want is to pay all of your bills on time, think that you've repaired your credit score, and discover that there is an error that could prevent you from receiving a home loan. You're entitled to a free credit report from each of the three major credit bureaus every year, so be sure to take advantage of this right to ensure that every item listed on it is correct. If you've settled a debt with a collector, but it still appears on your credit report, it is your responsibility as the consumer to contact the credit agency and have them correct the error.
5. Be prepared
Before you know it, the two-year waiting period will be over! When that happens, be prepared to show the lender any document that they request, especially considering you've filed for bankruptcy. You were a financial risk in the past, but you want to make sure the lender knows that you've changed your ways. In addition to bringing proof of income with you, be prepared to show them that you have a good debt-to-income ratio, that you have job stability and have been employed at the same company for an extended period of time, and that you have money in the bank. By “money in the bank”, we don't just mean a positive balance in your checking account. Bring proof that you haven't bounced any checks, and have documentation of all savings accounts, 401(k) assets, and retirement plans.
By following these tips, you'll be back on your feet financially in no time, and could be a homeowner in just a couple of years!
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