Buying a Home after Bankruptcy

When you first filed for bankruptcy, people warned you of the impossibility of buying a home after bankruptcy. Well, put their voices out of your head—they were wrong. Buying a home after bankruptcy is possible… provided you meet a few conditions.

Very rarely does anyone have enough money for a new home stuffed into their back pocket, ready to hand over to the realtor. Most people put forth a down payment, then take out some kind of home loan, or mortgage. However, getting approved for these kinds of loans after bankruptcy is a bit more complicated.

For the most part, bankruptcies are classified into one of two categories: Chapter 7, and Chapter 13. A Chapter 7 bankruptcy gets rid of all your outstanding debts, while a Chapter 13 bankruptcy makes an arrangement with your lenders so that you can pay your lenders a pre-established sum over a period of time. A large portion of lenders treat both kinds of bankruptcies equally—that is, both bankruptcies require that two conditions be met:

1. A period of 2 to 4 years passes between the point where you have paid off and/or wiped out your debts, and the point where you apply for a mortgage after bankruptcy.
2. New credit must have been established.

Holders of Chapter 13 bankruptcies take note: you’re not likely to find a lender willing to approve you for a mortgage after bankruptcy while you’re still in the process of making your Chapter 13 payments. Lenders will wonder why you are house-hunting when you should be focusing on paying outstanding debts. Lenders who are willing to give out a mortgage after bankruptcy might not offer you the most competitive mortgage offers they have available.

The first requirement for a post-bankruptcy home loan is that you let a period of at least two years elapse between your mortgage application and your bankruptcy dismissal. A mistake prospective home buyers often make is thinking that this two year period is reason enough for a lender to grant them a mortgage. This two-year period is not even the minimum. Lenders will want to see that you’ve taken steps to re-establish your credit, and have developed a history of making payments on time. New credit demonstrates to your lender that, since sorting out your bankruptcy, you have developed the ability to effectively handle your money and credit accounts. This evidence must come from multiple sources, so you’ll need at least three (preferably four) sources of new credit.

These new credit accounts must prove that you have purchased on credit and made payments on time, each time, at regular intervals for at least two years. These accounts must also be in addition to rent payments to your landlord.

Sources of new credit after bankruptcy can include secured credit cards, and proof of regular payments for at least twelve months. At the end of this twelve-month period, you can ask for clean credit reference letters. These letters should come from any source to which you give monthly payments. Examples include:

• auto insurance provider
• home telephone provider
• pager or cel/mobile phone service provider
• internet provider
• cable television provider
• water provider
• gas and/or electricity provider

Remember that, in order to obtain a loan to buy a home after bankruptcy, you need to really demonstrate a new, good credit history. That’s why the more references there are to vouch for your clean credit, the better.