Home Loans after Bankruptcy

You didn’t mean for it to happen, but it did: you maxed out your credit cards, lost your income, and filed for bankruptcy. You’ve started to pull things back together, and found the home of your dreams. But you can’t buy it, because no one gives out home loans after bankruptcy… right?

Not necessarily. In the past, any bankruptcies on your record meant that you could kiss those visions in your head of home loans good-bye—at least until ten years had elapsed since you went bankrupt. Things have changed, however, and though you still have to adhere to certain conditions not applicable to non-bankruptcy-holders, you can still be eligible for a home loan after bankruptcy sooner than you think.

There are two main types of bankruptcies: Chapter 7, and Chapter 13. A Chapter 7 bankruptcy eliminates all your previous debts, while a Chapter 13 bankruptcy negotiates a payment arrangement with your lenders such that you repay all your lenders a determined sum over time. Many lenders treat both bankruptcies the same way—that is, they want to see anywhere from two to four years elapse since you have wiped away your debts.

In general, it’s harder to find a lender who will lend during the period you’re still making Chapter 13 payments. Most such lenders will inquire as to why you are purchasing a new home rather than paying off existing debts. The lenders who are willing to give out a home loan after bankruptcy won’t necessarily offer you the most competitive home loans.

One thing to keep in mind, though, is that in addition to time elapsing between your filing and your obtaining a home loan after bankruptcy, the lender will also want you to prove that you have established new credit. New credit proves to your lender that, since filing for bankruptcy, you have learned to effectively handle your money and manage credit accounts. Most home loans after bankruptcy require that you establish a minimum of three (preferably four) new credit accounts where you can demonstrate having purchased on credit and made payments on time consistently for at least two years. Rent payments do not count (although those, too, will be looked at).

The mistake some would-be post-bankruptcy home loan seekers make is thinking that the period of time between bankruptcy discharge and their home loan application is good enough to get approved for a home loan after bankruptcy. It isn’t. Credit is every bit as important as time when it comes to obtaining post-bankruptcy loans, especially home loans. Lenders want proof that you’ve established a pattern of paying people back on time.

You can establish new credit after bankruptcy by signing up for secured credit cards, and by demonstrating proof of regular payments for at least one year.

After this period, you may be eligible for a clean credit reference letter. The best sources of letters are anyone to whom you provide regular 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, the more regular payments you can demonstrate, the better.

Some people opt for a type of home loan after bankruptcy known as a home equity loan. In this type of loan, you put your home up as collateral for the loan. You can get a home loan after or during bankruptcy with a home-equity loan. This is a loan that puts your house up as the collateral. This type of loan offers low interest rates and tax deductibility. Basically, you sell your house to creditors, then re-purchase it. Home equity loans vary greatly in terms of feasibility and legitimacy, so if you’re considering this option, don’t do it alone. Be sure to consult our directory of bankruptcy lawyers to find a professional who can help you select a home equity loan that works for you.