Examine Your Interest Rate Options
Now, lets discuss the nature of the financing. You have two options either to get a fixed-rate or an adjustable-rate mortgage.
With a fixed-rate option, you have to stick to the interest rate available when you sign your loan documents. It allows you to have a regular mortgage payment. But you need to refinance the home loan it if you want a lower interest rate.
Conversely, adjustable-rate mortgages keep changing as per market rate fluctuation. Due to the unpredictability, you would have a much larger monthly payment than you started.
Buying A House In 2022 After Bankruptcy Step By Step
Although the negative impact on your credit remains with you for up to 10 years after bankruptcy, you should not put your life on hold. With the right strategy, you can even qualify for a mortgage. With this you can get a new home.
In this article we have focused on buying a house after bankruptcy. If you want to learn more about mortgages, check out our article Home refinance after bankruptcy. There we talk about the different types of loans and mortgages that you can get.
Now, lets take a look at some information and steps to consider when buying a house after bankruptcy.
What Types Of Home Loan Can You Get After Bankruptcy
The process for buying a home after Chapter 7 bankruptcy, or even Chapter 13 bankruptcy, depends on what type of mortgage loan you apply for. Each one has a different seasoning period, which determines how long you have to wait until you qualify again.
Of course, you also have to meet the lenders other basic mortgage requirements, so its important to know those as well.
Here are three of the most common mortgage products available today and how each one treats buyers with a bankruptcy in their past.
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Buying A House After Bankruptcy: Ways To Woo A Lender
To start the mortgage process, lenders require a detailed letter explaining why you needed to file for Chapter 7 or Chapter 13 in the first place. Ideally, the bankruptcy would have been caused by an extenuating circumstance beyond your controlsuch as the death of an income-contributing spouse, the loss of employment, or a serious illness.
In other words: A lender likes to see that you were hit with hard times that had a significant negative impact on your expenses or income, and made it impossible to meet your financial obligations.
What a lender wont want to see is someone with a die-hard shopping habit or a lackadaisical attitude toward paying credit cards on time. If thats you, youll have to prove youve changed.
Whatever the reason you filed for bankruptcy, lenders will need to properly document your extenuating circumstances, so be prepared to provide proof detailing your life event.
Medical bills, a doctors note, a death certificate, or severance paperwork are all acceptable evidence that prove to lenders that you are a safe bet worthy of a home loan.
Is A Conventional Loan Right For You
A conventional loan can come from three organizations called:
- Ginnie Mae: Government-owned loans such as FHA loans, VA loans, and USDA loans
- Fannie Mae or Freddie Mac: Private loans or government-insured loans
You cannot get a lender to approve Fannie Mae or Freddie Mac loans if:
- You filed Chapter 7 bankruptcy in the last four years
- You filed Chapter 13 bankruptcy and got a discharge within the last two years
- Your Chapter 13 bankruptcy was dismissed less than four years ago
Sometimes, the waiting period can be shortened for major life changes, called extenuating circumstances. Things like a divorce, losing your job, or illness or accidents that result in large medical debt are beyond your control. They can reduce your waiting period after these circumstances.
Some banks or private loan officers can choose to underwrite a loan with less strict rules and waiting times, or more strict rules. That always depends on the bank’s practices.
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Getting A Mortgage After Bankruptcy: Waiting Periods
Understand itll take time to rebuild the trust needed for lenders to consider your application. In most cases, the soonest Rocket Mortgage® can help you refinance your house or get into a new one is 1 year after the discharge or dismissal of your bankruptcy.
The length of the waiting period depends on the type of bankruptcy you filed and the type of loan you want to get.
How Long After Bankruptcy Can I Buy A House
You can buy a house approximately one or two years after filing for bankruptcy, only if you restore your credit and avoid new debt. Filing a Chapter 7 or Chapter 13 bankruptcy will impact your credit report and put a negative score on your credit. But it does not mean that you cannot buy your own house.
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Create A Budget Together
Another step you can follow to buy a house after bankruptcy is taking control of your monthly budget. You can create a reasonable budget by paying all your bills on time. Figure out your overall monthly expenses, and check out the spaces you can adjust your budget. Besides, you can foresee upcoming annual costs, including taxes or car registration, and keep some money aside to settle these expenses.
What Type Of Mortgage Can You Get After Bankruptcy
Its technically possible to get any type of mortgage loan after a bankruptcy. There are no rules in place that permanently exclude you from getting a certain type of loan because youve gone through a bankruptcy. As long as you meet the waiting period discussed above, youre free to apply. But you can qualify for some types of mortgage loans much easier than others.
An FHA loan could be a great option if you have a bankruptcy on your record. FHA waiting periods are shorter than other types of loans. If you have a Chapter 13 bankruptcy, theres no waiting period at all after a court dismisses or discharges you. FHA loans also have looser requirements compared to other types of government-backed loans.
One of the major benefits of getting an FHA loan after a bankruptcy is its lower credit requirements. Even after a court dismisses or discharges your bankruptcy, it will still negatively influence your credit score. A Chapter 7 bankruptcy will stay on your credit report for 10 years, while a Chapter 13 bankruptcy will stick around for 7 years.
During this time, your credit score will be much lower than before your bankruptcy. You can buy a home with an FHA loan with a credit score as low as 580 points. You may even qualify for a loan with a score as low as 500 points if you have a down payment of at least 10%. However, at Rocket Mortgage®, the minimum credit score is 580.
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Downsides Of Buying A House After Bankruptcy
Although you may qualify for a mortgage after bankruptcy, it might not be a good option if you donât qualify for good loan terms.
The mortgage may come with a âpotentially higher rate that can cost you tens of thousands over the life of the loan,â Metcalf said, compared to what someone would pay with no bankruptcy filing and a lower interest rate.
You could hold off on buying a home until you qualify for better loan terms. In the meantime, focus on improving your credit and saving for a down payment.
Disclaimer: The above is solely intended for informational purposes and in no way constitutes legal advice or specific recommendations.
Review And Repair Your Credit
After bankruptcy your credit profile can contain both correct and incorrect negative elements. To complete bankruptcy, you must eliminate all remaining debt balances, zero balances, and have collections accounts closed.
Be sure to check your credit report to make sure it was updated correctly when completing your bankruptcy debt discharge. You may need to go through the credit repair program if you find items that need to be removed or updated.
Note: You are entitled to a free credit report from each of the big three credit rating agencies: Equifax, Experian and Transunion.
Items and Possible Errors to Look for on Your Credit Report
- Make sure you can see debts that have already been paid or discharged.
- Check that there is no information that is not yours due to similar names and addresses or wrong social security numbers.
- Information from a former spouse that should no longer be mixed up on your report.
- Incorrect account information due to identity theft.
- Out of date data.
Note: You might be interested in learning how does filing for bankruptcy affect your spouse.
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Offer To Pay The Trustee An Amount That Will Pay All Secured Creditors Adminstrative Expenses And Provide A Benefit To Unsecured Creditors
Finding a creative solution for the trustee can help you buy an asset from a bankruptcy trustee.
However, a bankruptcy trustee generally must sell the property for an amount that pays all lenders in full. However, a bankruptcy trustee can reach an agreement with a lender to take less than the full amount or for the lender to give the trustee a carve out whereby part of the sum owed to that lender will be paid to the trustee for the benefit of the bankruptcy estate. This allows a trustee to sell an underwater property by providing a benefit to creditors.
Without payment in full or the consent of any lender being paid less than the full amount, a trustee generally cannot sell the property, at least not within the Ninth Circuit. Clear Channel Outdoor, Inc. v. Knupfer , 391 B.R. 25 see 11 U.S.C. section 363.
In other words, unlike a foreclosure trustee who has the authority to sell the property at a given price such that the property will be sold at that price , when a bankruptcy trustee wants to sell property, they must receive a certain amount of money to sell that property.
That amount of money constitutes the total of all liens, the costs of sale, all administrative expenses, payment of the homestead exemption to the debtor, if any, plus some additional amount intended to benefit unsecured creditors.
How Bankruptcy Can Affect Your Ability To Get A Mortgage
Bankruptcy can significantly lower your credit scores, remain on your credit reports and affect your ability to obtain credit, including a mortgage loan, for up to 10 years. Fortunately, its impact lessens over time.
For a lender to even consider you for a mortgage after bankruptcy, your bankruptcy must be discharged. A bankruptcy discharge is a court order that eliminates your debts. In addition to making sure your bankruptcy has been discharged, a lender will look at your credit report to determine your creditworthiness.
It’s a good idea to check your credit report before you apply for a home loan to make sure it’s accurate. Look for mistakes such as incorrect or outdated information or accounts that were not included in your bankruptcy filing that are listed as part of it. Be sure to contact the credit agency as soon as possible and dispute any errors you find.
When you do begin to apply for a mortgage after bankruptcy, your lender will likely ask you a few questions about your bankruptcy. They may ask you when your case was discharged, what you’ve done to establish new credit, and how you’ve been keeping up with your bills. It’s a good idea to have the answers to these questions ready beforehand so that the application process runs smoothly.
Let’s dive deeper into how each type of bankruptcy can affect your ability to get approved for a mortgage.
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What Are Conventional Loans
Conventional loans are those originated by banks, credit unions and online lending sources.
They are not guaranteed by the government, but they typically have the best interest rates and terms, which means lower monthly payments. The most common type of conventional mortgage is 30-year fixed-rate, which accounted for 79% of mortgages between 2019 and 2021, according to ICE Mortgage Technology.
Conventional loans require a credit score of 620 or higher. The higher the score, the better the terms. One of the biggest advantages is that a down payment of 20% means you dont have to pay private mortgage insurance, which can add thousands to a mortgage.
Even if you dont put down 20% at the closing, once the equity in the house reaches 20%, the PMI is dropped. With an FHA loan, it never drops, and you have to pay a one-time up-front premium of 1.75% of the base amount of the loan.
The waiting period for a conventional loan after bankruptcy is:
- Chapter 7 Four years after discharge date
- Chapter 13 Two years. If the case is dismissed, which happens when the person filing for bankruptcy doesnt follow the plan, its four years.
How Can I Buy A House After Bankruptcy
The good news is you can still buy a new home even if you declare bankruptcy. It may be a long process and require extraordinary effort, more than the average prospective homeowner.
Legally, you have to wait until the judge dismisses your bankruptcy before getting a loan. Still, later on, it overall depends on how fast you can get your finances back in order.
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You May Need A Credit Score Of 500 Or Higher To Buy A House
The waiting period and loan approval are essential factors, but some loan officers will not consider you until you rebuild your credit score. Credit scores typically range from 300 to 850.
For each type of loan, you need a credit score of the following:
- FHA loan: 500+
- VA loan: no minimum credit score
- USDA loan: 640+
- Fannie Mae or Freddie Mac: 620-640 is the lowest they will accept
If your bankruptcy was years ago, but no one will loan to you, you may have options. There could be misinformation on your record or an outdated credit score.
Talk to a bankruptcy attorney about the issues you face in the home buying process to learn about your options. A new home is attainable within one to two years after bankruptcy if you take the right steps and seek legal guidance during the bankruptcy journey.
Buy A Seller Financed Home
There are real estate investors who buy houses that have gone up for auction or have been foreclosed on back taxes. As a general rule, they will get them at a very good price and sell them quickly.
Some will sell these houses just as they were, that is, without a credit check and with 0% interest.
This is one way of buying a house after bankruptcy, even with bad credit.
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Seek Help From A Financial Professional
Sound advice can help you weave your way through the obstacle course. A nonprofit credit counselor can sit down with you and go over budgets and ways to approach buying a home after bankruptcy. A financial professional can offer or help in improving your credit score.
Professionals are called that for a reason. They can help. Do not be afraid to seek it.
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How Bankruptcy Can Affect The Home
When youre asking can I buy a house after filing bankruptcy, its helpful to understand the process you will need to complete. This process is unique for every family and every home-buying experience. Bankruptcy varies in different situations as well. In general, however, heres how these two things interact at some key points.
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What Are Todays Mortgage Rates
Todays mortgage rates are at historic lows.
Typically, home buyers applying after Chapter 7 bankruptcy will be charged higher interest rates. But shopping around in todays lowrate market could help you net a fair deal on your home loan.
If youre thinking about buying a home, check with a few mortgage lenders to verify your home loan eligibility and find out what rates you qualify for.
Is An Fha Loan Right For You
The only government-guaranteed loan is an FHA loan from the Federal Housing Administration. An FHA mortgage can be risky because you lose your house in foreclosure if you cannot make the mortgage payments.
However, it can be less risky to you since the government will pay your mortgage lender if you cannot make the payments. It will not add to your debt, but you will have a foreclosure on your new credit report on top of the bankruptcy filing.
You can get an FHA loan when:
- Two years have passed since you filed for Chapter 7 bankruptcy
- You have made one year’s worth of on-time payments in your Chapter 13 repayment plan
- The lender agrees to approve the loan
- The bankruptcy court agrees you can take on more debt before you have good credit again
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Improve Your Credit Score
Improving your credit will take some time, but fortunately you can catch your stride immediately, There are straightforward ways to get back on track.
Pay all your bills on time. A consistent, on-time payment record is the best way to build your credit score and credit history. Thatâs especially true for auto loans, credit card bills, and other accounts that lenders report to credit bureaus.
Get a secured credit card. A credit card is actually a great way to rebuild your financial profile. It may sound strange since you just discharged your debt. But, showing off good and consistent credit habits will make you a more attractive borrower.
Higher limits look better on your report, and a relatively low limit is easier to qualify for. Charge something every month, and make more than the minimum payment on time every month.