Are you dreaming of owning a home but worried that a past bankruptcy has put that dream on hold? It’s a common concern, and the truth is, navigating the path to homeownership after filing for bankruptcy can seem complicated. However, a bankruptcy doesn’t permanently disqualify you from securing a mortgage or finding your perfect property.
While it represents a significant financial event, it’s also a chance for a fresh start. This guide is designed to help you understand the process, explain the key factors lenders consider, and provide practical steps you can take right now to prepare for buying a home. If you want to learn more about buying a home after a bankruptcy, keep reading.
Understanding Bankruptcy
Bankruptcy is a legal process designed to help people who can no longer pay their debts. Think of it as a financial fresh start that is overseen by a federal court. There are different “chapters” of bankruptcy, but two common forms for individuals are Chapters 7 and 13. With Chapter 7, you sell off non-exempt assets to pay back credits, and the remaining debt is often discharged.
Chapter 13 bankruptcy allows you to keep your property while repaying some or all of your debt over a three to five-year period through a structured repayment plan. While it offers significant relief from financial stress and creditor calls, it is a serious step with long-lasting consequences for your credit report.
A bankruptcy gives you the chance to reorganize your finances and start rebuilding your financial future without the burden of overwhelming debt. Understanding which chapter might be right for you requires careful consideration of your specific financial situation. When filing, you and your attorney will determine which chapter is right for you.
Can You Buy a Home After a Bankruptcy?
If you are considering purchasing a home, you might worry about the impact a bankruptcy may have on your ability to qualify. Purchasing a home after a bankruptcy isn’t so simple, but you can qualify for a home loan, as long as you have waited for the mandatory waiting period to pass. The waiting period length will vary depending on the loan and bankruptcy type.
Individuals who filed for Chapter 7 bankruptcy will need to wait between 2 and 4 years before they may apply for a home loan; those who filed for Chapter 13 may wait anywhere between 0 and 4 years before applying. If you’re trying to buy your first home after a bankruptcy, it is best to reach out to a real estate agent who has experience handling this situation.
Going into the homebuying process is already incredibly daunting, and you may be even more stressed by your previous bankruptcy. By working with an experienced real estate agent, you can trust that you’re making the best decision for your current financial situation without overwhelming yourself.
Is Mortgage Insurance Required After Filing for Bankruptcy?
As you prepare to take on this new financial responsibility after a bankruptcy, you want to ensure you understand exactly what you’ll be expected to pay. While you may be prepared for paying your mortgage, homeowners’ insurance, and essential utilities, you may not be prepared to take on mortgage insurance as well.
But, in some cases, this may be required. While it isn’t required as a part of a bankruptcy, it may be a requirement established by your loan program. If you applied for a conventional mortgage and have less than a 20% down payment, you are typically required to pay Private Mortgage Insurance (PMI).
FHA loans require mortgage insurance if you have a down payment that is less than 10% of the loan, while VA and USDA loans do not require a down payment or insurance. If you are unsure which mortgage loan is best for you, your chosen property, and your current financial situation, it is best to turn to your real estate team for support.
Tips for Improving Your Credit Score After Bankruptcy
One of the biggest factors that impacts your homebuying ability after a bankruptcy is your credit score. While a low credit score won’t stop you from buying a home, it does impact whether you’ll be approved for your chosen loan. If you are approved for a mortgage loan with a low credit score, you may also have a much higher interest rate than other buyers.
This can be incredibly frustrating, but there are a few things you can do before applying for your loan to improve your credit, increase your chance of being approved, and lower your interest rates. Some great ways to improve your credit score after a bankruptcy include:
- Review Credit Reports: Before doing anything, get a copy of your credit report from the three major credit bureaus (Equifax, TransUnion, and Experian). Ensure all appropriate debt was discharged and dispute any errors immediately.
- Pay Bills on Time: The easiest way to improve your credit score after a bankruptcy is to pay all of your bills on time. This plays a major role in your FICO score, and by never missing a payment, you establish yourself as a reliable borrower.
- Get a Secured Credit Card: Major banks offer secured credit cards, which require you to put down a cash deposit that acts as your credit limit. Use this for small purchases and ensure the card is paid in full every month to build a positive credit history.
- Maintain Low Credit Utilization: While it is important that you use your credit card regularly, it is essential that you don’t overuse it, as this can make lenders weary. Maintain under 30% credit utilization to increase your credit score.
While improving your credit score after a bankruptcy can be a slow process, it is a worthy venture. Keep focused and your score should begin to slowly move upward.
Let Us Help You Buy a Home After a Bankruptcy
When you’re ready to purchase a new home after a bankruptcy, trust that our Premier Utah Real Estate team is here to help. With decades of experience helping homebuyers across the Wasatch Front find their perfect home, even in complex financial situations, we’re confident that we can do the same for you.
If you would like to speak to our team about purchasing a new home, don’t hesitate to contact us today.
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