How to Buy a House After Bankruptcy

April 11, 2022

Is it possible to buy a house after bankruptcy? 

Your credit needs to be rebuilt and you need to be patient.

It is true that a bankruptcy proceeding may allow you to reduce or even eliminate your debts, but you will damage both your credit report and credit score in the process, limiting your future access to credit for things like credit cards, buying a house, and a car loan.

After bankruptcy, buying a house is possible, but it will take some financial planning and patience. A credit report should be checked regularly to ensure what should be there is there and nothing that shouldn’t be. Secured credit cards and installment loans can be used to rebuild your credit, so make sure you make all payments on time and in full every month.

What You Need to Know About Buying a House After Bankruptcy 

Buying a House After Bankruptcy: The Discharge from Bankruptcy 

What is the waiting period for buying a house after bankruptcy? It depends. Before a mortgage loan request can even be considered, however, the bankruptcy must be discharged. An order from a bankruptcy court that discharges your (the debtor’s) obligations and prevents your creditors from seeking payment for discharged debts is called a bankruptcy discharge.

This means you are not responsible for paying discharged debts, and creditors cannot try to collect them. Bankruptcy just involves a discharge of your debts. The lender will want to see it even if it does not necessarily signal the end of your case. Bankruptcies are usually closed shortly after discharge.

10 Years

The period during which bankruptcy can affect your credit report.

Review Your Credit Report Today 

A credit report details your credit history and is used by lenders to determine your creditworthiness. You do not have to wait 10 years to start buying a house even if bankruptcy filings remain on your credit report for up to ten years.

Your credit report should be accurate and current so that it can speed up the process. You can check it for free. There is a right to receive one free credit report each year from Equifax, Experian, and TransUnion, the “big three” credit agencies.

Rather than requesting a credit report all at once, stagger your requests so you can get a report every four months. Thus, you can keep an eye on your credit report throughout the year. An excellent credit monitoring service may also be helpful here.

You should look for repaid or discharged debts on your credit report. Any discharged debt cannot be reported as being current, late, outstanding, or converted into a new type of debt (e.g., with a new account number) by your creditor. Should something similar appear on your credit report, it is essential that you contact the credit bureau immediately so the error may be corrected.

Check for the following errors:

  • Identical names/addresses or incorrect Social Security numbers that are not yours
  • Theft of identity and incorrect account information
  • A former spouse’s information (that has no longer been mixed with your report)
  • Information that is no longer relevant
  • Accounts that are incorrectly closed (e.g., accounts you closed that appear as closed by the creditor)
  • Accounts that are not part of your bankruptcy filing that appear to be part of it.  

You can use secured credit cards and installment loans to rebuild your credit.

Rebuilding Your Credit 

A mortgage applicant must prove they can repay their debts if they intend on applying for a loan to buy a house. If you have declared bankruptcy, your credit options may be very limited. Secured credit cards and installment loans are two ways you can rebuild your credit.

You can get a secured credit card by using money in a savings account as collateral for the credit line on the card. Credit limits are determined by your previous credit history and how much you deposit into the account.

To demonstrate your ability to repay your debt, you should avoid falling behind on payments at all costs. The creditor will take money from your savings account and reduce your credit limit. Credit agencies are notified about the activity on a secured credit card, unlike most debit cards. This can help you rebuild your credit.

Regular payments are required for installment loans, including a portion of the principal, plus interest. Personal loans and auto loans are two examples of installment loans. Installment loans require that you consistently make your payments on time and in full to rebuild your credit. Failure to do so will further damage your credit. Ensure that you are able to service the loan before you take out an installment loan.

When to Take Out An Installment Loan 

The two years following bankruptcy are a good time to apply for a mortgage, since you’ll likely get better terms, including a lower interest rate. It is important to remember that even a small change in interest rates can considerably affect the cost of your home and your monthly payment.

An example would be if you had a $200,000 30-year fixed-rate mortgage at 4.5%, your payment would be $1,013.37 per month, and your interest would be $164,813, totaling $364,813. The same loan at 4% would result in a lower monthly payment of $954.83, a far lower interest rate of $143,739, and a total cost of $343,739 – a savings of more than $21,000 because of the 0.5% variation in interest.

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