After you file for bankruptcy, you receive a fresh financial start, but the new beginning doesn’t come without any consequences. Bankruptcy does hurt the filer’s credit report that will stick around for years after the date of the discharge of debt. Depending on the type of bankruptcy you file, the bankruptcy can stay on your credit report for up to ten years. But you don’t have to wait until the bankruptcy falls off your credit report to start living your life again.
Many find that with the right strategies they can even qualify for a home loan, one of the most robust types of financing to get approved for in the lending industry. If you are hoping to purchase a home after filing for bankruptcy, make a plan now to get your credit and your mindset in the right place for approval.
First: Set a Date
Determine when you want to buy. The ideal time frame is at least two years after filing for bankruptcy. This delay allows time to build up some positive credit and prepare your finances so you will be able to obtain a mortgage loan approval. In some cases, this time frame is not viable. For instance, if the bankruptcy filing put an automatic stay on the foreclosure of your home, you might have to sell the property quickly and downsize. The choice comes between the old foreclosed home, and moving on to a new one; so often the better option is to seek a rental property for two years to allow yourself time to prepare to purchase a home after bankruptcy.
Second: Do a Credit Check
You may want to enroll in credit monitoring so that you can find those credit errors. After the type of severe financial distress that leads to bankruptcy, your credit report may include a high number of negative items. Many will be correct, but some may be incorrect. Once the bankruptcy is complete, the remaining balances on debts are discharged, and the balances on your credit report should be reported as zero with collection accounts listed as closed. Check your credit report and make sure it has been updated accurately after your bankruptcy. If you discover outdated or incorrect listings, request their removal.
Third: Actively Rebuild Credit
The easiest way to combat negative information on your credit report is to offset it with positive info. Following bankruptcy, take steps to rebuild your credit immediately. Start by obtaining a secured credit card. Secured credit cards require that you provide the financial institution with a deposit equal to the amount of “credit” they offer you on the card. Make charges on the secured credit card strategically and manage the debt carefully. Every positive payment made toward the card will help build your credit. Attempt to maintain the balance at no more than 20% of the total credit line that is available on the card to maximize the positive reporting effect. And, of course, always make on-time payments on all debts you have including student loan debts; which are not dischargeable, any small personal loans you take out to rebuild your credit, etc.
Fourth: Get on a Budget and Save
Getting from bankruptcy to mortgage approval will take financial stability. Create a budget to support your success. Consider using one of the many budgeting platforms that make it easy to build a budget and track expenditures. After entering your accounts and creating categories, most budgeting apps will allow you to see how much free cash flow you have available to save. You will need as much money as possible for a down payment so the more you save for the first couple years after bankruptcy before you buy a home, the better.
Fifth: Maximize Your Down Payment
As stated previously, save as much money as possible to use as a down payment. The larger the down payment, the easier it is to qualify on a mortgage. You will want to aim for the ideal of 20% of the purchase price of the home to allow you to be eligible for traditional mortgages instead of riskier options. Although some will qualify for an FHA-loan for as little as 3% down, it’s still a good idea to make 20% the goal to maximize your chances of qualifying.
If you are filing for bankruptcy and need to make a plan to purchase a home after bankruptcy, please get in touch with one of the experienced bankruptcy attorneys at Aronow Law PC. We have the experience and knowledge to help you reach your home ownership goals even after receiving a discharge of debt.