Buying a house after bankruptcy does have its challenges, but it's also possible. A bankruptcy can have a detrimental impact on your credit score, and because of this, it is harder to qualify for financing. But if you plan ahead and take steps to reverse credit damage, you can realize your goal of owning a home. Here are seven tips for buying a house after bankruptcy.
1. Rebuild Your Credit
Buying a house after bankruptcy is based on whether you rebuild your credit. Because a bankruptcy can reduce your credit score by 200 or more points, you need to open new credit accounts and practice good credit habits. Getting a secured credit card or a subprime auto loan are two of the easiest ways to reestablish credit. Once you have new credit, pay your bills on time each month.
2. Wait at Least 24 Months
To apply for a conventional or an FHA mortgage after bankruptcy, you have to wait at least two years. Postponing your dream of buying a home can be annoying. However, being patient allows time to rebuild your credit score. The higher your credit score, the lower your mortgage interest rate.
3. Know Your Options
Different types of loans are available to you. Knowing your options can help you apply for the most appropriate loan. For example, a conventional mortgage loan requires a credit score of 680 or high. But an FHA loan only requires a credit score of 620. If you're ready to apply for a mortgage but you don't have a high score, applying for an FHA loan might be your best bet.
4. Save Your Money
Most home loans require a down payment of 5%. However, a lender may require 10% down if you have a bankruptcy in your recent past. Be diligent about saving. To drum up cash for your down payment, set aside 10% of your paycheck, reduce shopping, sacrifice vacations and cut other expenses.
5. Maintain Steady Employment
Too many gaps in your employment record can hinder your ability to buy a house. Your lender will request tax returns and your employment history. You need at least two years of consistent employment to qualify for a home. Lenders prefer applicants who stay with the same employer for two years, or at least within the same field.
6. Don't Accumulate Debt
A high debt to income ratio can also hinder buying a house after bankruptcy. Although you need to establish new credit, be careful with how you use credit cards. To avoid debt, pay off your balance in full every month, and only charge what you can afford. Accumulating additional debt looks bad when applying for a mortgage.
7. Compare Lenders
Even if you rebuild your credit score and maintain better credit habits, some lenders may charge a higher rate because of a past bankruptcy. To avoid this headache, shop around and get home loan quotes from multiple banks. This is the easiest and fastest way to make side-by-side comparisons.
A bankruptcy is not the end of the world, and you can recover. With any credit mishap, it's important to improve your credit habits and learn from your mistakes. Make better decisions and you can buy a house after bankruptcy. How have you improved your credit score after a major slip?