While bankruptcy can temporarily limit your use of credit and put a pause on your financial goals, it isn’t the be-all, end-all of your financial future. In fact, you may find yourself able to secure a mortgage within just a few years of declaring bankruptcy. However, you will need to do some extra legwork to meet the lender’s expectations and manage their concerns.
Focus On Your Credit
Once your debt is discharged, start taking decisive steps toward a higher credit score. What you do depends a lot on the circumstances of your bankruptcy. If you had a huge amount of debt and were starting to get behind on payments, your credit score may already have dropped a lot. In this case, bankruptcy may actually cause your score to increase.
If you were keeping up on debt payments before bankruptcy, expect a hit to your credit. Focus on responsible use of credit to build your score back up. Use a credit card for small purchases and pay it off regularly. If you have non-discharged debts, such as student loans, continue paying those on time to help your credit score.
Limit the Amount You Spend on a Home
When you get preapproved for a mortgage, you may be approved for less than you expect due to your bankruptcy. As long as you know this before starting the process, you can keep your home buying expectations reasonable and keep your budget relatively low. If you take out a smaller loan, the bank may have fewer hurdles to overcome when it comes to approving your loan.
Save a Larger Down Payment
There are some mortgage types that only require a small down payment. Despite this, you may need a larger down payment if you have a recent bankruptcy on your credit report. The bank needs more assurance that they won’t lose money on your mortgage, and a sizable down payment helps provide this assurance. If you bring a larger down payment to the table, you also have a vested interest in keeping up with your payments and protecting your equity in the home.
Explore Your Loan Options
In today’s real estate market, there are lots of different mortgage types. You may want to meet with a mortgage broker to check out different loan types and decide which one best suits your needs. One popular option is an FHA loan, which is available to first-time buyers below a certain income limit. Your bankruptcy must be at least two years old to qualify. Another benefit of FHA loans is the fact that they only require a 3.5% down payment.
You may also look into USDA loans if you’re interested in purchasing a home in a rural area. The waiting period on this one is slightly longer at three years from the time your bankruptcy is discharged.
Conventional loans typically have the longest waiting period, but since these loans are not backed by the government, every lender sets its own requirements and standards. This highlights one of the benefits of working with a mortgage broker. Once they know your circumstances and your financial history, they can check your credentials against a wide range of potential lending options.
If you’re a veteran, you may also want to check out VA loans. These are exclusively offered to active-duty military, veterans, and qualifying family members. Like FHA loans, they are available to you two years after bankruptcy.
If you’ve declared bankruptcy or are considering bankruptcy, homeownership is not an impossible dream. Bankruptcy is a bump on the road to owning your home that will delay the process for a while, but it’s one you can overcome with careful planning and saving.
Learn About Your Bankruptcy Options with Padgett & Robertson
Bankruptcy may be an option for you if you have more debt than you can handle and you see no reasonable way out of it. Rather than forging ahead and putting yourself through the wringer each month, take some time to figure out if bankruptcy is the right choice for you. Schedule a meeting with the team at Padgett & Robertson to find out if this is a viable choice for you. Contact us or call our team at 251-342-0264.