Bankruptcy can be a truly frightening prospect. One common worry is that bankruptcy will prevent you from ever qualifying for a mortgage, and thus, owning a home.
Fortunately, there are ways to minimize the impact bankruptcy has on your financial future, including your ability to buy a home. In fact, bankruptcy can be the best way to save your existing home, and it is better than foreclosure if you wish to buy another home in the future.
Below are steps to take after bankruptcy that will help you toward qualifying for a home loan in the future, on terms that work for you.
Gradually improve your credit score
You can begin rebuilding your credit as soon as you declare bankruptcy. The first step towards “curing” your credit is to pay whatever bills you have, such as your rent or car payment, on time and in full. It is also very important to continuously track your credit score, post-bankruptcy.
In deciding whether you qualify, mortgage lenders will examine your recent work history, debt-to-income ratio and credit score, among other factors. Keeping your debts as low as possible while paying bills consistently on time will go a long way toward qualifying you for a mortgage.
Remember that having access to credit is not a negative. In fact, having unused credit — known as a low utilization rate — can actually improve your credit score. This means having one or two credit cards and keeping them well below the credit limit. If you have a credit card with a $5,000 limit, for example, keeping a balance at $500.00 or less will reflect positively. Of course, paying off your entire balance every month is the most ideal.
How long should you wait before buying a home?
There is typically no mandatory “waiting period” to qualify for a home loan after bankruptcy. A lender could conceivably offer you a loan the day after your bankruptcy is complete. However, different lenders have different internal rules and procedures for dealing with bankruptcies. For example, the earliest you can qualify for an FHA loan is two years after declaring Chapter 7 bankruptcy, but there may be ways to get an FHA loan even before then.
It may make sense to wait a few years before getting a mortgage, however, because the terms of the mortgage will improve with your credit score and with a larger down payment. Hence, it often makes the most sense to wait a few years to purchase a home after declaring bankruptcy so that you can receive a more favorable interest rate, which translates to lower monthly payments. Once your credit is back up and you have saved enough for a down payment, shop around for the best interest rate. Don’t assume that just because one lender turns you down, that all other lenders will do the same. You need to patiently research many options.
Bankruptcy is not the end of your financial journey
Declaring bankruptcy does not mean you are giving up. Instead, bankruptcy is usually the first step in taking control of and getting your personal financial situation back in order. Bankruptcy is often one of the best ways to preserve your ability to buy a home in the future. Don’t view bankruptcy as the end of your fiscal journey—it’s just the end of your financial chaos, and the beginning of your financial sanity and independence.
If you have questions about bankruptcy, including whether it is right for you, contact Mariano & Coiro, a New Jersey bankruptcy and real estate law firm.