You Can Buy a House after Bankruptcy

Bankruptcy is not necessarily the end of your ability to own a home of your own. Different Lenders and loan programs look at bankruptcy differently, however two years after the final discharge date seems to be the magic number. After two years, many lenders are likely to be more willing to make you a new loan, provided that you have maintained good credit and made all your subsequent payments "paid as agreed" (paid on time.)

The reason for your bankruptcy may often be a factor in your loan. Was it caused by something outside your control?  Major medical expenses, a company or plant closing, lay-offs, etc., are often looked upon differently than an intentional refusal to make payments.  Some programs seem to almost ignore the bankruptcy if is was due to major medical expenses.  At Scott & Associates, Realtors, we understand that unfortunately, sometimes bad things do happen to good people.  We will be glad to assist you in making a house your home.  Please feel free to email or call us to discuss your specific needs. 

Will I pay higher interest rates because of it? 

Most likely - Yes,  however it may not be as bad as you might think. 

A while back, we helped a family straighten out their credit and purchase a house of their own.  Their payment could have been $350 per month with perfect credit, but with their bankruptcy, was higher at $375.  They had been paying $550 per month rent and were delighted to pay the higher rate and lower their payments.  Every case is different, but the secret is maintaining a good payment history after the bankruptcy and re-establishing your credit. 

Considerations Before Going to Bankruptcy

I have spoken to many people who thought that bankruptcy was the only way out.  In some cases that was true, however others indicated that they could have refinanced and made the payments, but their attorney convinced them that after the bankruptcy, they could go out and get a loan anywhere.  Unfortunately lender after lender turned them down and said, "No, you must wait two years before we would be willing to consider you for a loan." 

If you are considering this as an option, be sure to talk to a number of lenders before you make your final decision.  Some lenders would rather see a long period of late payments that were worked out, than a bankruptcy.  All lenders view things a little differently so be sure that you visit with some of your local lenders before making your final decision, and remember, it will show up on your credit report for many years to come, and could even affect future employment opportunities. 

Credit Reports and Credit Counseling Services

There are many services available, however there have been numerous complaints that many of these have been called rip offs.  Do a Google search (www.Google.com) for credit counseling services with the words problems or complaints, before making a final decision.  Some lenders, rightly or not, consider using such a service almost the same as a bankruptcy.  Often you can work things out with your creditors yourself without using them.

If you do talk to your creditors, ask that they send you any agreements in writing.  Be sure to take notes with the date, time, telephone number that you called and the person you talked to with their last name and extension number if possible. 

Do not agree to anything unless you know that you can do it, and are willing to do it.  If the terms that they suggest are not possible, ask for terms that you can live with, then do them.  It may be better to promise ten dollars a month and send more, than to agree to a higher amount that you can't do. 

Ask them if you make your payments as agreed, would they be willing to clear your credit record and erase past late payments.  Remember, they have no obligation to do so, but it doesn't hurt to ask.  Get ALL agreements in WRITING, get the name of the person you spoke with and write it down.  People have been transferred before they put things in writing.  Ask when you can expect to receive it, verify that they have your current address and ask if you can call them back a few days after the expected arrival date if it doesn't arrive. 

Get a copy of your credit report and review it for errors.  Ask the credit bureau for help in getting errors corrected.  If a creditor agrees to clear your credit but doesn't after you have reliably made your payments, you can include a copy of their written agreement in your credit file.  You can also include brief letters of explanation.  Ask your credit bureau for details, but keep it short and precise. 

Tips to Re-establish Your Credit

Maintaining your good credit after a bankruptcy is more important than ever.  You've had a second chance, and are sure to make the most of it.  Do your best to make payments on time and remember, if you miss a single payment, then make all the rest, each payment could be counted as one month late.  For example, at the end of a year, rather than showing up as having missed a single payment, your credit report might show up as twelve months of one month late. 

Open a second (or third) savings or checking account that you use ONLY for an actual emergency.  If the money is in your main account, it is much easier to spend it.  A different account makes it easier for some people to save and not touch their savings. 

Get and Use a credit card.  First, save up enough cash to pay it off in full, but don't.  Set the cash aside in a safe place and resist the temptation to use it.  Then, charge at least $500, but don't pay it off immediately, take at least six months to make payments to show a payment history.  Strongly consider only using your card for essential purchases such as groceries. 

Establish and maintain a good relationship with your Landlord if you are renting.  Consider paying your payment a day or two early if your landlord will permit.  The Landlord will often be called upon as a credit reference. 

When to Call Your Realtor

The best time to call your Realtor is approximately two months before the two year anniversary of the final discharge date.  That will give you some time to get your affairs in order.  Be sure to have a copy of all your bankruptcy (and divorce, if applicable) paperwork.  We can help you select a Lender to get preapproved and find out what loan amount you will qualify for.  Be sure to ask for a written pre-approval letter. 

Hopefully you will have set aside money for a down payment or closing costs.  If you are a Veteran, first of all, thank you!, a VA loan requires no down payment, but will require that you pay closing costs, but will allow the Seller to pay these for you if the Seller is willing.  FHA requires 3% down and again, the seller can pay closing costs if they are willing.  Often the sales price may be raised to include the amount that you are asking the seller to pay on your behalf. 

Some loan programs will finance all of your down payment and closing costs, and do not require you to have any of your own money, if the Seller will agree to pay all your costs and expenses.  This can be a good option, however remember, you are financing an additional amount. 

If you are able to set aside an additional amount of money for down payment or closing costs, it can save you money and increases the number of your financing options.  However, in a rapidly appreciating market, by the time you save a substantial down payment, prices could have risen to the point that it was not worth the wait. 

At Scott & Associates, Realtors, we'll do our best to give you the information that you need to make an informed decision.

Note:  These comments are personal opinions and should not be considered a substitute for your own research or to replace consultation with your own attorney.  All situations are different, however these suggestions are based upon actual situations where they have been beneficial. Every attempt has been made to provide factual information, however we may have missed it in some areas, and you should verify this information independently.