Buying a House After Bankruptcy: What You Need to Know
Declaring Chapter 7 or 13 Bankruptcy is often devastating and can turn your home buying plans upside down. Bankruptcy can lower your credit score and shut down your ability to borrow money. It will take some time to build back enough credit to get a new credit card or take out a mortgage on a home. The federal government recently adopted new home purchase rules for those who are back to work after a bankruptcy or foreclosure where the borrower, as soon as 12 months after filing or a foreclosure, can obtain a new mortgage if they meet certain criteria. Find out about eligibility for these back to work programs in your area.
Rebuild Your Credit
You must first begin rebuilding your credit. Be diligent about paying your bills on time and apply for a secure credit card. Keep a close eye on your credit report to ensure nothing inaccurate has been reported, including the discharged debts from your bankruptcy.
Wait Two Years
Getting a loan may require 18-24 months after bankruptcy is discharged. However, some predatory lenders may not follow this timelines and will offer you a loan at extremely high interest rates. Keep waiting it out if your only options are outrageous terms and conditions.
Prepare for High Interest Rates
Expect to pay a higher interest rate due to your bankruptcy. Making a large down payment can decrease the loan amount which will reduce the amount of interest owed. You may be able to refinance your mortgage later on to get a lower rate.
Don’t Buy More House Than You Can Afford
It is not uncommon for people to fall in love with a house outside of their budget. Since a mortgage payment will be a fixed expense you will be paying off for years to come, it’s crucial for this to be a manageable amount. A general rule of thumb is to have a mortgage payment no more than 30% of your income. Mortgage calculators can help you determine what you will pay each month once interest and your down payment are factored in.