Bankruptcy is a difficult process for anyone, but it's especially painful when you feel like your dream of owning a home is slipping away. However, home ownership may be just around the corner after all. If you take care of your credit and make good financial decisions after your bankruptcy, you may qualify for a home loan sooner than you think. Here is your roadmap to buying a home after bankruptcy.
Step 1: Estimate a Timeframe
There are different types of home loans available, and they each have their own set of rules regarding waiting periods for procuring a loan after bankruptcy. The average is roughly two years (or 24 months), but the range may be anywhere from one to four years, or even longer if you have additional bankruptcies or foreclosures on your record.
Conventional loans are held by private lenders, and they may have any waiting period they choose. However, most private lenders follow the standards set by Fannie Mae and Freddie Mac, which are the following:
- For Chapter 7 bankruptcies, the standard waiting period is four years. However, if you can prove the bankruptcy was caused by extenuating circumstances outside your control, you may reduce the period to just two years.
- For Chapter 13 bankruptcies, the waiting period is two years after discharge as long as you've been making your payments on time. If your case is dismissed, the waiting period is four years.
- If you've had multiple bankruptcies over the past seven years, the standard waiting period is five years (or three years for extenuating circumstances).
- After a foreclosure, the standard waiting period is seven years.
FHA loans have their own set of standards, which are usually a little more lenient because these loans are backed by the government.
- For Chapter 7 bankruptcies, the waiting period is two years unless there are extenuating circumstances, in which case the wait is shortened to one year.
- For Chapter 13 bankruptcies, the waiting period is only one year, as long as you've been making payments on time.
VA loans typically have a waiting period of two years for Chapter 7 and one year for Chapter 13.
Step 2: Rebuild Your Credit
Now that you have a timeframe, you can focus on rebuilding your credit while you wait.
First, you should check your credit report for errors or inaccuracies. These are not uncommon after a bankruptcy, so it's best to dispute them now. You can obtain a free report each year from each of the three major bureaus.
Next, you should consider opening a new credit card or securing a small loan to help build your credit. Make sure the terms fit your budget, and always make your payments on time. Oftentimes, people have difficulty securing a standard credit card after bankruptcy. In this situation, a secured credit card (either through your bank or through a credit company) will suffice. You will need to secure the card with your own money to start using it, but it will help you build credit right away. You should aim to use no more than 20 to 30 percent of your available credit at any time.
Step 3: Budget and Save
To make sure you stay on time of your finances and don't fall back into the debt trap, you should budget and save your money for the upcoming down payment and closing costs. If you need help getting started, please give us a call. Our goal is to help you manage your debt and build wealth.
Calculate Home Affordability
First, you will need to determine how much home you can afford. Our office can help, using your income and current (or projected) expenses.
Save a Down Payment
Next, you should estimate your down payment and start saving money each month so you'll have enough when it comes time to buy a home. In general, experts recommend saving 20 percent of the home's cost, though many lenders are much more lenient. We will look at the program options available estimate the down payment that you'll need. There are loans that start with as little as just 3 percent down.
Keep Financial Records
During the years leading up to your home purchase, make sure you keep accurate financial records. It helps to be organized and ready with this information when purchasing a home.
Step 4: Shop for Loans
Finally, the waiting period is over! You can start shopping around for a loan with the best terms and interest rate. You can get ahead of the game by keeping an eye on your credit. At this point, you should know your credit scores. Also, keep in mind that your bankruptcy will stay on your credit report for a while – up to 10 years (from the discharge date) for Chapter 7 bankruptcies and up to 7 years (from the filing date) for Chapter 13. In general, lenders look more favorably on Chapter 13 bankruptcies because your debts are being repaid. Still, neither bankruptcy should bar you from obtaining a home loan once the lender's conditions are met. Together, we will look at the programs available and find the one that best suits your needs now, while also keeping your goals for the future in mind.