Buying a house after a bankruptcy can be less challenging than you might think. In some cases, you might be able to buy the day after or even during your BK, while in others, you may have to wait as long as four years after discharge. If you do have to wait longer, there are ways to prepare yourself during this time so that once it’s up, you can get approved.
Here’s what you must know.
Fix Your Credit
The first thing you should work on is fixing your credit. It likely took a big hit when you filed for bankruptcy. Fortunately, there are ways to build it back up.
Pay All Bills on Time
Any debts you have left on your credit report, make sure you pay on time. If you wiped the slate clean, you may not have anything to pay, but any new debts you take on (which you should), make sure you pay on time.
Apply for New Credit Slowly
Don’t go all gangbusters and apply for any pre-approved offer you get, because you will get them. Instead, take out new credit slowly and show responsible use of it.
If you have to, start with a secured credit card. They are easy to get and help you build credit. As you improve your credit history, you’ll have more opportunities for other credit cards and loans that will help you build credit.
Keep Your Debt Low
Keep your debt-to-income ratio as low as possible. Even though most loan programs allow DTIs of 36% - 50%, because you have a BK in your past, a lower DTI will better your chances of approval.
Wait the Required Time
Waiting is the hardest part of buying a house after bankruptcy. If you want a conventional loan, you must wait four years after the discharge of a Chapter 7 bankruptcy or two years after a Chapter 13 dismissal.
Government-backed financing requires less time, with approvals occurring in 1 day to 3 years (depending on the program and bankruptcy type).
Explain Your Situation
When you get pre-approved for a mortgage, you’ll need to provide a letter of explanation regarding the bankruptcy.
In your letter, explain why it happened, what the circumstances were, and most importantly, how you’ve picked up the pieces to move forward. Lenders want to know that you can take on new debts responsibly and won’t be at high risk of default.
Be Careful Moving Forward
Once you get pre-approved, don’t do anything else to your finances or credit. Don’t open new credit, close old accounts, or make large deposits or withdrawals from your bank account.
Act as if your personal financial life is frozen for the time being and take the pre-approval for all it’s worth.
Buying a house after bankruptcy takes time, but it’s possible. In the meantime, you may have to rent or live with relatives, but if you can show that you picked up the pieces, you can get approved for a mortgage.
You’ll need a down payment, decent credit, and a good explanation of why you had to file bankruptcy. In the end, though, you’ll get the mortgage you need and can enjoy a fresh start.