Bankruptcy severely dents your financial credibility. After your bankruptcy discharge, the bankruptcy will reflect on your credit report for a maximum of 10 years. So, the lenders will shy away from offering you a home loan with bankruptcy. And even if they agree to lend to you, they will not offer you a good deal.
The problem of getting house loans after bankruptcy
It is a well-known fact that getting home loan after chapter 7 or any of the other types of bankruptcies is really difficult. You would find it really tough to get any mortgage loans for 2 years after your bankruptcy discharge (and after 2 years too you would need to prove to the lenders that you have timely met all your payment obligations in that 2 year period).
Let’s take a look at the problems that you will face in getting a home loan with bankruptcy:
a) The lenders will ask you for more amount as down payment. This means that the lenders will ask for a larger percentage of home cost to be paid by you as down payment (as compared to what they would ask-for from someone with good credit history). So, you must have enough money available with you to satisfy this requirement of lenders.
b) The lenders will offer you worse interest rates than what they would to people with good credit history. This will translate into higher interest outgo on your home loan and would also influence your monthly mortgage installment amount.
c) The other terms and conditions imposed by the lenders will be unfavorable too. This will translate into higher fee under various provisions e.g. for late payments or defaults.
So, it does look like an uphill task to get a home loan in bankruptcy. But it is not impossible.
How to get a home loan after bankruptcy?
As mentioned earlier, bankruptcy will severely dent your credit report and will make it really tough for you to get any kind of loans. In fact, some employers also use your credit report to judge your overall credibility and such employers might reject candidates with bad credit score. So, it is very clear that after bankruptcy you need to immediately start working towards improving your credit score as it will influence your eligibility for getting any kind of loans/credit in future.
To improve your credit score, you must ensure that you make all your payments (including all your bills) in full and on time. You can also get a secured credit card and use it as a means to help improve your credit score. Again, ensure that you use this secured credit only for building your credit score (and do not treat it as a credit line available to you) and make all your payments on time and in full.
It is important to mention here that you must chalk out a financial plan for yourself keeping in mind your income, debt, expenses, assets, emergency-fund requirements and long-term/short-term/medium-term financial requirements. Your plans to buy a home and when to buy it should be part of this financial plan. Obviously, it should be a feasible plan.
Since your debt to income ratio will influence your eligibility for home loan, you should also look to increase your income (try for better paying jobs or additional sources of incomes) and ensure that you don’t add more debt… rather look at tapering off all the debts that you are still servicing.
And yes, before applying for your home loan, you must get a copy of your credit report and ensure that it is correct. Pay special attention to items that don’t belong to you i.e. incorrect entries that would affect your credit score negatively. Report any discrepancies to credit bureaus and get them corrected.
Besides home mortgage loans, you could also consider going for land contracts i.e. seller financing which might be available to you at better terms.
In any case, you should seek advice from a seasoned real estate professional/lawyer that deals in such matters as getting a home loan after bankruptcy.