One generally unfounded fear people have is that filing bankruptcy will stop you from buying a house. That’s just not true.
Granted, being able to qualify for a mortgage immediately after filing bankruptcy might be a bit tougher, but the reality is that filing bankruptcy and clearing away unmanageable debt can actually make it easier to get qualified for your new house.
If you are carrying a lot of debt and you don’t see yourself paying off that debt in the next five years or so because you are just making minimum payments, the bankruptcy route can save a lot of time and get you into your new home faster. I know, that sounds opposite of what many say, but it is absolutely true.
When you consider that about 70 percent of people that file for bankruptcy file a chapter 7 bankruptcy and discharge their debt in just a couple of months, and that they can then concentrate on rebuilding their credit quickly, you can see why filing bankruptcy might actually be an advantage to getting a mortgage and buying a house.
Rebuilding your credit after bankruptcy is super simple. You can just follow my free guide – How to Easily Rebuild Your Credit and Have Good Credit Again. That guide will get you immediately building great credit to get you ready to qualify for that future mortgage.
The next step is to start saving all the money you can towards the down payment on your new home. The more you can save, the easier it will be to qualify for that new mortgage. Think about it from the lender point of view, the more the buyer puts down on the new home, the less risk the lender has to losing money in case of a default. A bigger downpayment just helps the lender get to “Yes” as fast as possible.
After a few months of saving and rebuilding your credit you should find a local mortgage broker that represents a number of different lenders. This is not going to be your local banker. Explain to them that you filed bankruptcy recently but you’ve already begun to rebuild your credit and save your down payment. They will be impressed you are motivated and working hard towards getting the mortgage.
While you won’t qualify for that new mortgage just yet, meeting with the broker at this point and coming up with a joint plan to execute will get you mortgage as fast as possible. The broker will also be able to fill you in on what types of mortgage will be available to you.
If you follow all of these steps you can most likely qualify for a new mortgage in as little as a year or two after your bankruptcy was discharged.
So you see the reality of getting a mortgage after bankruptcy is a lot different than many people assume. Not only is it possible to get a mortgage after bankruptcy, it is probable you will be able to move into your new home sooner than anyone expected.
Mortgage Interest Rates After Bankruptcy
It is possible that the interest rate offered on your post-bankruptcy mortgage might be a little higher. But it is also possible to refinance the mortgage at a later time and lower your rates if you decide you want to stay in the home. A slightly higher interest rate is not the end of the world.
The higher the interest rate, the lower the purchase price you will qualify for. This is because as the interest rate increases, the monthly payment gets larger as well. Your mortgage qualification is going to be based on the amount of monthly payment you can afford.
But I would suggest that purchasing a home based on the largest mortgage you can qualify for isn’t smart anyway. Just because a lender will approve you for X mortgage, does not mean it is either affordable for you or sustainable. It just means the lender is willing to take the risk.
After bankruptcy I would suggest that you think about buying a property that you can afford on one salary. This will leave you room in case your household suffers an unexpected loss of income or some other misadventure.
I’d also recommend you consider getting a 30 year fixed rate mortgage and if you want to pay off your home in 15 years, just make larger monthly payments. The extended mortgage will give you a lower monthly payment you can fall back to if you run into unexpected times.
And one final bonus tip, if you make your first full mortgage payment on the day you close on your new mortgage, you can shave years off your mortgage payments. That’s because the first payment goes straight towards reducing the balance owed and not interest.
After I filed bankruptcy I followed all of these same procedures and I was able to purchase a home within just a couple of years.
Don’t allow others to fill your head with misinformation, getting a mortgage after bankruptcy is not only possible, but it is probable with a well executed plan.
When you buy your home, please be sure to post a picture of your new home in the comments below. I’d love to celebrate your happy moment.