Buying a Home after Bankruptcy
A lot of people think that once you file for bankruptcy, you'll never be able to buy a home. That's nonsense. Many people buy homes after bankruptcy. But it's a little more difficult, and in order to do so, you'll have to prove to prospective lenders that you know how to manage your finances. Looking at it from a lender's point of view, your track record in that area was less than wonderful. You'll have to convince them that you've learned from your experiences.
Following the advice on this page will help you do that and to eventually realize realize your dream of home ownership.
Let's be realistic, though. During the first few years after filing bankruptcy, it will indeed be very difficult, if not impossible, for most folks to get a mortgage. That's just the way it is. The days when mortgages were considered risk-free loans are dead. The housing bubble killed them. Lenders have to be much more cautious nowadays. So don't expect to get approved for a mortgage the day after your discharge is final. Barring some uncommon event like winning the lottery or marrying into money, you're going to have to wait a few years.
That doesn't mean, however, that you should spend those few years sitting around sulking. There are many things that you can and should do during the first few years after bankruptcy to make it easier for you to persuade a mortgage lender to take a chance on you a few years down the road. You should spend the first few years after bankruptcy doing the preparatory work that will enable you to buy a home a few years in the future. These steps include:
Re-Establishing Consumer Credit
Before you consider buying a home, you should already have between two and four "bank cards" in your name with at least two years' history of prompt payment and balances well under the cards' limits, both individually and combined. That means that ideally, you shouldn't owe more than 20 percent of your credit limit on any one card, nor owe more than 20 percent of the combined limits on all your cards. You also should have either an active installment loan (such as a car loan) with a good payment history, or a paid-off installment loan with a perfect payment record.
Have a Respectable Savings Account
Almost all home mortgages (the exception being mortgages guaranteed by the Veterans Administration) will require that you put a sizable amount of money down as a down payment on your new home. If you don't have the down payment, you can pretty much forget about getting a mortgage -- especially if you have a bankruptcy on your record. The days of zero-down mortgages are over. Too many banks took a beating on them when the housing bubble burst, prompting both the government and the banking industry itself to tighten up the rules.
The time between bankruptcy and applying for a mortgage, therefore, should be spent socking away the money for that down payment in a savings account or money market account. You can learn more about these accounts here.
Even if you plan to apply for a VA mortgage and opt for the no-down payment option, your prospective lender will still feel a lot more comfortable if you have some money in the bank. Having a healthy savings account gives you a cushion against short-term financial crises. It also shows the lender that you have enough income to put some aside for savings, and that you're responsible enough to actually do so. Remember that the VA guarantees only that the lender will be partially repaid if you default. They don't guarantee that you will get the loan. The lender still gets to make that decision.
Don't Try to Buy the Taj Majal
Again, be realistic. Be willing to consider a perfectly nice, but less-luxurious home, in a decent but not quite "ritzy" neighborhood, even if it's not necessarily "the home of your dreams." Paying rent every month for the rest of your life and having nothing to show for it when all is said and done isn't exactly most people's dream, either. So consider a fixer-upper, or even a "flood house" if a competent engineer gives you a thumbs-up on its structural condition and absence of microbial problems (and assuming that flood control measures have since been implemented, of course.)
Depending on where you live, you may also want to consider a condo, co-op, or even a mobile home. Any of these are better than renting, which is basically throwing money away every month. Even mobile homes, which depreciate rather than appreciate, retain some value; and if you own the land the mobile home is sitting on, then you are acquiring equity in the land.
Consider Renting-To-Own or Seller Financing
Some sellers are desperate enough to sell their homes that they're willing to consider rent-to-own or seller-financing options. I'm not a lawyer, however, so I'm only going to briefly describe how these options work. You really need to talk to a lawyer if you decide to consider these home-buying strategies.
A rent-to-own contract is basically a lease with an option to buy at the end of a predetermined period. Three years is a popular term, but it can be anything that the seller and buyer agree upon. Usually (but not always), there will be some additional amount above and beyond the rent added to the monthly payment. If the tenant exercises the option to buy, then that amount is credited toward the down payment. If not, then typically the tenant forfeits that money. But again, the specifics can be whatever the landlord and tenant / buyer agree to as long as they conform to state law, so please consult with an attorney before signing a rent-to-own contract.
Seller-financing (also known as the seller "holding the mortgage") is when the person selling the house essentially lends the buyer the money to buy it, and secures that loan with a lien against the house. A down payment is almost always required, but it doesn't have to be of any particular percentage. It can be whatever is agreeable to both the seller and the buyer. The title usually transfers at inception, and the buyer becomes the owner and is responsible for all taxes, insurance, and other costs associated with the property.
In almost all cases, a "balloon payment" will be due after a certain period of time (three years is a common term) at which time the buyer will have to secure a more conventional mortgage. If the buyer still can't get a mortgage, then the seller can foreclose against the buyer just like a bank would.
Both renting-to-own and seller-financing can be paths to home ownership for people whose credit is so badly damaged that they can't buy a home any other way. They can help them buy some time while they improve their financial situations enough to qualify for a mortgage. But both methods tend to be more expensive paths to home ownership, and each method is full of potential pitfalls. Be sure to consult with an attorney before entering into a rent-to-own or seller-financing contract.
Mortgage Sources for Bankrupt People
Almost all banks, credit unions, and mortgage bankers are willing to talk to previously-bankrupt people a few years after their discharges, assuming that they've demonstrated financial responsibility since then. Most lenders are also willing to work with one or the other of two government-sponsored programs for home buyers. The first is sponsored by the Federal Housing Administration (FHA), and the second by the Department of Veterans Affairs (VA) and is only available to honorably-discharged veterans who served long enough to qualify. These programs may be a bankrupt home buyer's best friends.
The Federal Housing Administration will consider applicants for loan guarantees if a minimum of 24 months have transpired since discharge, and if the applicant has re-established credit since then. Having at least a bank card or two and a car loan (current or paid-off) should satisfy that part of the requirement. In some cases, FHA may consider your application 12 months after discharge, but only if certain extenuating circumstances apply (for example, if your bankruptcy was the result of medical expenses or lost income resulting from a serious illness from which you have now recovered).
Beyond those requirements, FHA will look at the standard factors creditors look at when considering loans, such as you income and financial stability since filing bankruptcy, your debt-to-income ratio, and other common-sense indicators of financial responsibility. They offer many different loan and guarantee options for home buyers, with varying down-payment requirements. For more information, click here to visit the FHA Web site.
VA Loan Guarantees
If you're an honorably-discharged veteran, the Department of Veterans' Affairs may offer a better route to home ownership than the FHA.
In general, veterans who have filed for bankruptcy are eligible to apply for a loan 24 months after their bankruptcies have been discharged, or 12 months after discharge if "extenuating circumstances" apply and they have either re-established credit or chosen not to re-establish credit. The second option doesn't mean that you applied for credit but were denied. It means that you chose not to apply for credit at all, except possibly for a car loan. Like FHA loans, VA loans have limits that vary depending on region. The VA also requires evidence of financial stability, employment, and other proof of ability to pay back the loan.
In most cases, no down payment is required when using a VA loan guarantee. For many years, down payments weren't even allowed, but that has now changed. Although it's not required, being able to put some money down will almost certainly make your lender feel more comfortable about writing the mortgage. Remember that the VA loan guarantee provides some protection for the lender in the event that you default. It doesn't guarantee that you will be approved for the mortgage in the first place.
Some banks and other lenders won't work with the VA. They don't think it's worth it to learn the VA's requirements and learn to navigate the agency's bureaucratic map. Other lenders only deal with veterans who are using their VA mortgage benefits. These lenders are experts in navigating the VA's bureaucracy and may be a better bet for veterans looking to buy a home. My advice is that you talk to both your own bank or credit union and a lender who specializes in VA loans. The VA's requirements are very strict, so the resulting mortgage should be pretty much the same no matter who issues it. The difference will mainly be one of efficiency. Lenders who are more familiar with VA mortgage requirements are generally better at it and may be able to get you in your new home more quickly.
For more information, click here to find all the information you'll need (and then some) on the VA's official Web site.
In summary, bankruptcy doesn't mean that you can never achieve the American Dream of home ownership. It does mean that you'll have to work at rebuilding your credit and exercising financial responsibility. It's also not something that you can do the day after your bankruptcy is discharged, but it's a goal you can start working on right now.
I wish you the best of success in reaching that goal!