Home Buying after Bankruptcy

Paying all bills on time is a great way to rebuild credit ratings. Demonstrate Responsibility Adella Jones, who lives near Durham, N.C., began repairing her credit immediately following bankruptcy. A newly single mother with two children to support, she worked hard to establish a stable employment history, rented an apartment and always paid her rent and utilities on time. Jones also bought items such as a washing machine on an installment loan and never missed a payment. When she finally qualified for a credit card, she never carried a balance. "I'd buy groceries on it, then go home and write the check to pay them off and put it right in the mail," Jones said. Eventually her hard work yielded positive results on her credit report. In addition, Jones beefed up her eligibility with a good job. She has been steadily employed in the same field since she filed bankruptcy. A stable employment history is a factor mortgage lenders consider when evaluating you for a home loan. While living in an apartment, Jones met a real estate agent who suggested she buy a home. When Jones mentioned her bankruptcy, the agent helped her find a lender willing to take a chance on her. Save for a Down Payment Terry Savage, financial expert and author of several books, including The Savage Truth on Money, agrees with mortgage banker Satnick, saying that with so many homes going into foreclosure, loan companies and banks are much warier. "The good news is there is so much supply on the market that you should be able to rent for far less than you could several years ago, and that gives you time to save money for a down payment," Savage says. A substantial down payment—minimally 15 to 20 percent, more is better—will help persuade lenders you're a good risk. If you find it hard to save, look into a payroll savings plan where money is automatically deducted from your paycheck. Look for Backed Loans Loans guaranteed by the Federal Housing Authority (FHA) are an excellent option for post-bankruptcy purchases. The loan is actually made by a lending institution with a promise by the FHA to pay the lender back if the loan goes into default. FHA loans typically require smaller down payments. Buyers with less than excellent credit, first-time buyers and those with low incomes often qualify for FHA loans. The maximum loan amount varies from area to area. You can apply for an FHA loan two years after being discharged under Chapter 7 and one year after discharge from Chapter 13, but your payments must be current. Most types of loans require two years elapse from the date you discharged your debts in order to qualify for a loan. Finding a Lender Ask friends and relatives to recommend a good mortgage broker or real estate agent. Be frank with potential lenders and let them know of your past bankruptcy filing. Satnick says that the circumstances surrounding your bankruptcy can make a difference. "Major medical bills, the death of a spouse and loss of significant income,” he says, “those carry a lot more weight (with mortgage bankers).” The Bankruptcy Abuse and Consumer Protection Act of 2005 requires credit counseling prior to entering bankruptcy. Additionally, some banks and credit unions offer in-house programs that are free for its customers or members. What about companies that offer to repair your credit? You can dispute erroneous credit information yourself for no charge. Credit repair companies charge to do the same thing and they cannot remove legitimate negative information on your credit report. The Federal Trade Commission’s web site offers help on choosing a credit counseling agency. If you haven't found a lender or saved enough for a down payment, alternatives still exist, but they aren't easy fixes. Consider renting with an option to buy or asking your landlord to self-finance the sale, a move known in some places as a land contract. While both may be long shots, if you want to be a homeowner, having filed for bankruptcy in the past shouldn’t stand in your way.

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