Mortgage after Bankruptcy

Many people may assume that if they declare bankruptcy they will never own a home. If you have been in the unfortunate circumstance that you have had to claim bankruptcy, do not let your dreams of homeownership die. It is possible to buy a house with a bankruptcy on your record. You just have to understand how. It might not be immediate, but if this is your goal, you need to work towards it the moment you step out of bankruptcy court.

 

  1. Change your habits. Do not use the same spending behaviors as you did prior to the bankruptcy. Be frugal and make sure that what payments you do have you make on time every single month.
  2. Maintain steady employment, preferably with the same company. Lenders want to be sure that you are willing and able to keep a job and make enough of an income to support a mortgage.
  3. Repair your credit.
  • You want to have at least three high-quality credit references.
  • If you cannot get a credit card, get a secured credit card. This is more like a debit card where you make a deposit to the bank that issues your card and your card will have that same limit.
  • Use the card lightly, but never charge more than 30% of its limit and pay it in full the following month. This will improve your credit score.
  • Establish a perfect payment history with each of your creditors and also with your utility companies, auto insurance company, phone service providers, etc. Obtain clean credit letters from each of these companies after each year.
  • Not only do lenders look at payment history, they look at debt-to-income ratio. Yours will improve immediately after bankruptcy because you will be released from all that debt. This is why you want to be very careful to keep your debt low and pay off balances right away.
  1. Rigorously save money. Forget the standard 10%. You will want to save 25% or more. You can do this by cutting out any extra spending and living very frugally. You can do this much easier if you have an option to live with family or share expenses with a roommate. Do not stop saving when you get a down payment. You will want to have the down payment plus at least three months worth of living expenses saved so you do not put yourself in the position to default or bankrupt again because you lost your job or you got sick. You must provide yourself a cushion so that you never have to go through the experience of losing the home you worked so hard to get.
  2. Contribute the max amount to your 401k and/or retirement accounts. If you are fortunate enough to work for a company that matches, do it at least to that amount. For example, if a company matches up to five percent, you want to have at least five percent of your pay go to that account. If you don’t, you are giving up free money. You may be asking, “How can I save more than 25% plus contribute to retirement?” You have to live like this because your life, happiness, and your future depends on it.
  3. There are lenders out there who will lend money soon after bankruptcy. However, many of these lenders will charge high interest rates. Don’t be blinded with wanting a house so badly that you are willing to risk your financial future by rushing into these lenders. If you are patient enough to build up your savings and repair your credit, the extra year you have to wait will mean thousands of dollars saved in interest.

Bankruptcy does not have to spell disaster for someone who wants to own his or her own home. There is life after bankruptcy; you just need to be very disciplined and frugal. This dream can still come true!