Buy a home after bankruptcy? Seems like a stretch for all but those who win the lottery once the discharge is issued. But play your cards right and you could be worrying about scheduling a closing date sooner than you ever thought possible.
After filing bankruptcy, you’re debt free. No more calls, no more lawsuits. Suddenly, the world feels a bit brighter and filled with possibilities. You start looking around your rental and thinking you might want to buy a home.
In order to buy a home after filing bankruptcy, you’re going to need to worry about two things. They are:
- Your level of savings; and
- Your credit score.
Your Savings Account (The Downpayment)
In order to buy a home, you must have a downpayment. Though the land of $0 down mortgages was wonderful for a time, it’s gone now. And if there’s a broker willing to do the deal for you, run the other way. When you don’t have a downpayment, you run the risk of going upside down on your mortgage the first time the Federal Reserve Bank chairman catches the sniffles. Definitely bad idea.
Spend the first year or so after filing bankruptcy focusing on your savings account. Sock away every spare dollar, and then some. Cut your cable or satellite television, consider ditching the landline phone in favor of the cell, and turn off your lights when you leave the room to save on electricity.
Clip coupons. Lots of them.
If you can, grow something useful in the garden rather than pretty flowers that can’t feed you.
If you want to buy a home, you need money. Lots of it. Save every dollar you can.
Your Credit Score
Going through bankruptcy will hit your credit score to the tune of about 150 points. Doesn’t sound like a lot, but when you remember your credit score tops out at 850 and seldom goes below 400 unless you’ve somehow lost your pulse, it’s pretty big.
You’re going to want to get to work on repairing the damage, and fast.
First thing to remember is that you must continue to pay your debts on time. If you’ve got student loans or a car loan, make those payments without fail. The student lender will report that positive payment stream, though the car lender may not unless you reaffirmed the debt. No reaffirmation? No problem – just keep copies of the cancelled checks and ask the finance company for a payment history before you go to the mortgage broker.
Next is that different mortgage companies may look to different credit reporting agencies – each of which may list different obligations. Some may list your utility payments, others may have the rent bill to the landlord. Keep on top of it all after filing bankruptcy to maximize the chances you can buy that dream home. You also want to check your credit reports after bankruptcy to make sure they reflect your debt-free world.
Finally, consider a single credit card after bankruptcy. Use it every month, then pay it off over a 2-month period to ensure that the payments show up on your credit report. That’s going to raise your score as well.
You can buy a home after filing bankruptcy, but the upshot is that you need to take some time to build yourself back up. Don’t rush it – Rome wasn’t built in a day. With hard work, however, you’ll get there just fine.
Jay S. Fleischman is a bankruptcy lawyer who helps people fight back against debt collection harassment.
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Last modified: January 18, 2012