Had a Bankruptcy? Yes, You Can Still Own a Home

Getting a mortgage after a bankruptcyDreaming of home ownership but afraid the reality of your credit history stands in your way?  Take heart: Filing a bankruptcy does not mean your dream of owning a home is dead.

Though few people want to file Chapter 7, 11, or 14, any form of bankruptcy can be quite freeing since it wipes out impossible debt and allows a person to start fresh. Many Americans learn their lesson well and become extremely careful about their credit after going through the process. Lenders know this. They know people make mistakes and that they learn from them. However, it’s up to you to prove you have indeed learned from the experience, and that you won’t make the same mistakes again.

Important Post-Bankruptcy Timelines

Once two years pass from the date you file, your credit score is no longer adversely affected by the bankruptcy. That means your FICO score will then only be based on your current credit ratings with creditors and your current debt.  But lenders will see the record of your filing when they check your paperwork, and that may adversely affect your mortgage process—though it won’t necessarily kill it. I’ll explain that later in this blog. The important lesson to take away here is that what you do with your credit-- starting the day after your bankruptcy is discharged—is how you’ll be judged. Pay your bills immediately. Don’t take on too much debt (or any, if you can help it!). Rebuilding your credit rating takes work, but it’s work you can do, and should do if you want to prepare for the responsibility of holding a home mortgage.

Though supposedly a bankruptcy disappears from your records within 10 years, you may still be asked if you’ve ever filed, and obviously you have to be honest. But in most cases, a decade old bankruptcy won’t stand in your way of a home loan if you have a decent income, low debt, good credit history those past ten years, and enough money for the down payment. Always save a copy of your bankruptcy discharge in case your lender asks to see it.

Higher Interest

People with excellent credit generally get the best interest rates. Lenders look at their history of repaying debts in a timely fashion as proof they’ll continue to do the same. A bankruptcy then may mean you can get a loan, but that you’ll have to pay higher interest than someone who hasn’t had a bankruptcy. However, interest is so low right now, you may find even higher rates to be reasonable enough for you.

Or, you can potentially offset that higher interest, or even avoid it completely.  Among your options: making a higher down payment (sometimes family will help here by gifting you part of that payment);  choosing a less costly home; getting a family member with strong credit and preferably who owns a home to cosign on the loan; or waiting a few years and being hyper-aware of your credit, building it back up and trying again once you’ve laid down a solid track record.

Getting Help

Buying a home is complicated and fraught with additional expenses (inspections, appraisals, closing costs), and this is true regardless of your credit rating. Seek professional advice. Some mortgage brokers, federal programs, and credit unions work specifically with applicants who have bankruptcies on their credit history. Meet with as many advisors as you can to be sure you’re getting the best deal for yourself, and to confirm that the timing is right for you to buy-- or that it’s not.

But it will be someday. That’s the point of this blog. Bankruptcy doesn’t mean your dream of owning a home is over. The best part: When you finally do, you’ll be that much more ready to make a success of it. And that success? So much sweeter. 

Resources

Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in the San Francisco Bay Area and Pacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert