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Buying a Home After Bankruptcy

  • Monday, May 11, 2020

    Unless you run a business or are a seasoned investor, your home is probably the most valuable asset you own.

    That’s assuming you own one.

    It’s also assuming you haven’t just lost one due to foreclosure or other difficult economic circumstances.

    The somewhat depressing reality of homeownership in the United States is that it can be a difficult ordeal for many.

    Homeownership doesn’t just take a financial toll on some. It can also cause marital strife, depression and anxiety for those who don’t own a home but who wish they did.

    Keeping up with the Joneses anyone?

    Even when you have a home, you may wish that yours was bigger or better than the one down the block. Didn’t your cousin just re-model his place? Yours is kind of an old dump now compared to his, isn’t it?

    Didn’t your brother-in-law just buy a new build? He’s got more bedrooms, he’s way closer to the beach, he’s got a third garage, and his kids have a playroom just waiting for the dump truck full of toys that will be arriving on Wednesday to fill it up.

    In comparison, your house is pretty basic. Your kids share a room. They don’t have a separate place just for their toys. Surely this lack of space and fun will stifle their creativity. When your brother-in-law’s kids are skipping off to the mailbox and opening their Yale and Harvard acceptance letters, your kids will be trudging their way to your trash cans, throwing away their rejection letters from the local community college.

    Additionally, there’s probably no place in the world where people place more of a premium on home ownership than in the United States. Countries that rate far higher in average happiness levels like Denmark, have very low rates of home ownership. Most of them live in tiny apartments and it doesn’t seem to bother them much. Then again, home ownership isn’t part of their personal identity as it is here.

    Whatever your personal stance is on the importance of home ownership, the fact remains that it’s a big deal for most people in this country, and it is a big problem for many.

    First the House, Then the Bankruptcy

    Bankruptcy can be a big reason for bankruptcy. Some are trying to prevent the foreclosure of their home. Chapter 13 bankruptcy can be a great tool for stopping a foreclosure and ensuring that your home stays yours. It gives you protection from creditors and it is a means to affordably get right with your mortgage company.

    Others file for bankruptcy because of losing a home through foreclosure and are now on the hook for money owed from a home they no longer own.

    Investors sometimes own homes either to flip for profit or to earn income as a rental property. These are risky endeavors and when they fail, they can drive people to file for bankruptcy.

    Still other people make choices that lead them to bankruptcy all in the name of trying to buy a home in the first place. They might work a second job to increase their income level and savings in order to help qualify for a home. If they burn out in the process and have to quit their second job, or if their primary job suffers and they are fired, it can leave them with less income and savings than they started with. The consequences of burnout can also cause them to make poor financial decisions, like living off of credit cards or using high-interest personal loans.

    Finally, one of the most common scenarios that homeownership causes is buying a place that is more expensive than the buyer can really afford. The allure of easy credit and Taj Mahal level housing causes many people to purchase what they can barely afford. When that happens, it is very easy to fall behind on payments. Even with steady income, the tight budget that results from an expensive home can cause people to struggle with money. This can lead to falling behind on mortgage payments.

    What happens when your income changes? If you own a more affordable home, a decrease in income due to a change in hours or a change of job can be managed with tighter budgeting. However, when you max out how much house you can afford based on your current income and then your income drops, it can be very difficult to keep up with your payments. This has led many homeowners to look for bankruptcy protection.

    I’ve Filed for Bankruptcy – When can I Buy a Home?

    Whatever the reason, you’ve now filed for bankruptcy. Like many who have recently filed, you are looking into buying a home. Unfortunately, you aren’t going to immediately qualify for that new place. Most banks have a restriction requiring you to wait until two years have passed after your bankruptcy is discharged. Your discharge doesn’t take place until your case is more or less wrapped up with the court system. So you can estimate that it will be four to six months or more from your filing date before you can start counting the days until two years have passed.

    Conventional Mortgages Versus FHA and Other Loans

    Some of you will qualify for mortgages that are different than a typical, conventional mortgage. This may offer you better rates and a lower down-payment option than a plain-old, vanilla-flavored mortgage.

    FHA loans require a low down payment and allow you to qualify for a mortgage with a lower credit score. They will require you to wait the same two years after your bankruptcy discharge as a typical, conventional mortgage. The fact that you don’t need as much money for a down payment or as good of credit makes using an FHA loan an appealing option after filing for bankruptcy, especially if you’ve had a hard time saving money and haven’t been diligently working on rebuilding your credit.

    VA loans are available to veterans and those who are actively serving in the military. They are similar to FHA loans in allowing you to qualify more easily for a home loan and with less money down. VA loans also have a two year waiting period after your bankruptcy discharge.

    USDA loans are geared toward rural home buyers and are also more lenient than conventional mortgages. They can be another great option for buyers who qualify for them. However, they do require a three year wait after bankruptcy discharge.

    It is important to keep in mind that special loan programs often have other requirements that differ from conventional mortgages in addition to a post-bankruptcy waiting period. The loan programs are special for a reason. They have been developed over the years to increase home-ownership rates for certain groups of people. Any mortgage expert will be well-versed in the multitude of loan programs that are available to you.

    This list of alternative programs is not a complete list. You may qualify for other, special mortgage programs given your unique set of circumstances. You should be sure to discuss in detail with your mortgage broker how bankruptcy affects your ability to qualify for a specific program. You can also reach out to the attorney who filed your bankruptcy case as well. He or she should have some valuable input on what programs are right for you.

    What Should I do While I Wait for my Discharge?

    While you wait, you can work on improving your credit score so that you will have good enough credit to qualify for a loan and get a decent interest rate once two years have passed from your discharge. So ultimately, the question should be, what can you do to improve your credit score?

    Pay Those Bills on Time, Every Time

    Paying your bills on time is imperative to improving your credit score. We can’t stress this enough – you must pay each and every bill on time. Any evidence on your credit report that shows you have been slow to pay or late to pay a bill will drop your score. When considering that your credit score has already taken a hit by filing for bankruptcy, you can’t afford to have any other negatives on your credit report.

    Secure Yourself a Credit Card

    You need to proactively work on getting some positive marks on your credit report for paying bills reliably and on time. One of the best ways to do this is by getting a credit card, charging on it at least once a month, and then paying it on time every month.

    You don’t have to have lots of charges on your credit card. Even if you only charge one thing a month and then pay it on time, that’s enough to ensure a positive mark on your credit report for that month. It may behoove you to pay it off completely every month, that way you don’t start to grow a balance and get into debt trouble right after completing a bankruptcy.

    One easy way to ensure you will use your credit card at least once a month while not growing a large balance that you can’t afford is to use a credit card exclusively for gas. You will definitely need to gas up your car at least once a month, and you won’t end putting hundreds of dollars a month on the card (unless you drive for a living). Plus, it gives you the convenience of paying at the pump.

    If you find it difficult to qualify for a credit card immediately after bankruptcy, you have the option of getting a secured card first. These cards are easier to get because you have to back them with a deposit of a few hundred dollars as a sort of collateral in case you default on your card. This makes them very easy to qualify for. Once you responsibly use your secured card for a short time, you will be able to move on to a regular credit card and no longer concern yourself with having money on deposit to secure a card.

    Student Loans – From a Burden to a Blessing

    If you’ve got student loans, keep paying them on time. Since they aren’t eliminated by filing for bankruptcy, they will continue to show up on your credit report. If you’ve got to pay for them anyway, at least you will get positive marks on your credit report for paying them on a timely basis.

    Keep Those Wheels a Turnin’

    After filing for bankruptcy, the payments you make on any vehicles that you own will not show up on your credit report because the car loan is technically discharged in the bankruptcy. However, you’ve still got to pay on the loan because if you didn’t, the bank retains their right to repossess your vehicle.

    It’s a bummer that you have to pay on your car for years after the bankruptcy without any positive recognition, isn’t it?

    Well… not completely. You can still get a finance history from the company you make your vehicle payments to. You can also get copies of your cancelled checks from your checking account to show your payment history. If you take both of these to the mortgage company when you apply for a home loan, it will help you qualify for your mortgage even if it doesn’t technically show up on your credit report.

    Another option you have when it comes to vehicles is a reaffirmation agreement. If you reaffirm the debt on your vehicle after you file for bankruptcy, you will again start to get positive marks on your credit report for these payments.

    What is a reaffirmation agreement?

    It’s essentially a new promise you make to the bank to keep paying on your vehicle. The terms are the same as before. Your interest won’t go up. What you owe won’t change. The down-side to reaffirming is that whole “new promise” part of it. Sure it gets you positive marks on your credit report, but the new promise essentially removes your vehicle from the bankruptcy, and therefore eliminates bankruptcy protection on the vehicle.

    When you don’t reaffirm your bankruptcy, your car is still protected by the bankruptcy for the life of the loan. This means that if you ever want to give your vehicle back to the bank (say for example the engine completely dies on it), you can hand it over to the bank and they can’t come after you for any money you owe them. But if you’ve signed a reaffirmation agreement, you no longer have this option. If you give your car back to the bank, you are stuck like the rest of us non-bankruptcy filers. They can still come after you for money owed on the vehicle.

    Sometimes a bank will require you to sign a reaffirmation agreement, so you won’t have a choice in the matter. But if they don’t, then you’ll have to weigh the benefits of reaffirming your vehicle and getting positive marks on your credit report versus losing the bankruptcy protection you have on the reaffirmed vehicle.

    Get That Credit Squeaky Clean

    You can easily get free copies of your credit report these days. Annualcreditreport.com is sponsored by the government and allows you to get free copies of your credit report from all three bureaus once every year.

    Once you get your report, look for any errors. You might have something that should have been discharged by your bankruptcy which is not showing up as discharged on your credit report. You can simply go through the credit bureau’s dispute process and provide them proof of your bankruptcy. They will then fix the error on your report.

    One easy, free way to go through this process is to find yourself a good mortgage broker. Anyone in the mortgage industry who provides quality customer service will usually pull copies of your credit report and help you get it cleaned up free of charge. They will even do most of the work for you.





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