Yes, You Can Buy a House After Bankruptcy – This Is How You Do It

It comes down to patiently rebuilding your credit

A bankruptcy proceeding can reduce or even eliminate your debts, but it will appear on your credit reports and damage your credit score in the process. This can affect your ability to obtain credit in the future for things such as new credit cards, car loans, and home mortgages.

Buying a house after bankruptcy is possible, but it will take some patience and financial planning. It’s important to check your credit reports regularly to make sure everything that should be there is there—and nothing is there that shouldn’t be. You can start rebuilding your credit using secured credit cards and installment loans, making sure all payments are made on time and in full each month.

Key Takeaways

• Bankruptcy is an unfortunate reality for many people, but it doesn’t mean you won’t be able to obtain a mortgage in the future.
• While your credit score is likely to take a major hit, you can rebuild your credit over time to minimize the impact.
• In the short term, check your credit reports for any incorrect items that could be hurting your credit score.
• In the long term, consider using secured cards and installment loans (including credit builder loans) to build up a positive payment history.

First Things First: The Bankruptcy Discharge

How long after bankruptcy can you buy a house? It varies. However, to even be considered for a mortgage loan request, the bankruptcy must first be discharged. A bankruptcy discharge is an order from a bankruptcy court that releases you (the debtor) from any liability on certain debts and prohibits creditors from attempting to collect on your discharged debts.

In simple terms, this means you don’t have to pay the discharged debts, and your creditors can’t try to make you pay. A discharge of your debts is just one step in the bankruptcy process. While it doesn’t necessarily signal the end of your case, it is something lenders will want to see. The court often closes a bankruptcy case shortly after the discharge. 

10 Years

The length of time a bankruptcy can stay on your credit report

Check Your Credit Reports

Lenders look at your credit reports—detailed reports of your credit history—to determine your creditworthiness. Your credit score is based on the information in your credit reports. Although bankruptcy filings can remain on your credit reports for up to 10 years, you don’t have to wait 10 years to get a mortgage.

You can speed up the process by making sure your credit reports are accurate and up to date. It’s free to check: Every year, you are entitled to one free credit report from each of the “big three” credit rating agencies—Equifax, Experian, and TransUnion. You can get them at AnnualCreditReport.com, which has been providing free reports once per week since the coronavirus pandemic.

If credit report availability goes back to once per year, a good strategy is to stagger your requests so you get a credit report every four months (instead of all at once). That allows you to keep tabs on your credit throughout the year.

There are a variety of credit monitoring services that can quickly notify you of any changes to your credit reports. Many of them provide a credit score and other useful services as well.

When reviewing your credit reports, look for debts that have already been repaid or discharged. By law, a creditor cannot report any debt discharged in bankruptcy as being currently owed, late, outstanding, having a balance due, or converted as some new type of debt (e.g., having new account numbers). If something like this appears on your credit reports, contact the credit agency right away to dispute the mistake and have it corrected.

Other mistakes to look for:

• Information that is not yours due to similar names/addresses or mistaken Social Security numbers
• Incorrect account information due to identity theft
• Information from a former spouse (which should no longer be mixed with your reports)
• Outdated information
• Wrong notations for closed accounts (e.g., an account you closed that appears as closed by the creditor)
• Accounts not included in your bankruptcy filing listed as part of it

Rebuild Your Credit

If you want to qualify for a mortgage, you’ll have to prove to lenders that you can be trusted to repay your debts. After a bankruptcy, your credit options may be fairly limited. Two ways you can start rebuilding your credit are secured credit cards and installment loans.

A secured credit card is backed by money you deposit in a savings account, which serves as collateral for the card’s credit line. The credit limit is based on your previous credit history and how much money you have deposited in the account.

If you fall behind on payments—something you should avoid at all costs, as you’re trying to prove you can repay your debt—the creditor may draw from the savings account and reduce your credit limit. Unlike most debit cards, the activity on a secured credit card is reported to the credit agencies; if you pay your bills responsibly, this allows you to rebuild your credit.

Installment loans require you to make regular payments each month that include a portion of the principal, plus interest, for a specific period. Examples of installment loans include personal loans and car loans. Of course, to rebuild your credit with an installment loan, you must make your payments on time and in full every month. Otherwise, you risk damaging your credit even further. Only get an installment loan if you truly need it, and first be certain that you will be able to service the debt.

Credit builder loans are a type of installment loan that are only used to help you build credit. They’re a bit like a reverse loan. Instead of getting the loan funds immediately and then paying the money back, a credit builder loan requires you to make all of the payments first. Once you’ve made the full set of loan payments, the loan funds are released to you. This allows you to build up a history of on-time payments without the risk of borrowing money.

The Right Timing

While you may qualify for a mortgage sooner, it’s a good idea to wait two years following the bankruptcy to apply, as you’ll likely get better terms, including a better interest rate. Remember that even a small difference in an interest rate can have a huge effect on both your monthly payment and the total cost of your home.

For example, if you have a $200,000 30-year fixed-rate mortgage at 4.50%, your monthly payment would be $1,013.37, and your interest would be $164,813, bringing the cost of the home to $364,813. Get the same loan at 4.00%, and your monthly payment would drop to $954.83, you’d pay $143,739 in interest, and the total cost of the home would drop to $343,739—more than $21,000 in savings because of the 0.5% change in interest.

Read the original article on Investopedia.