Recently on our legal forum a user asked, “I lost my job in 2008 and eventually had my home repossessed by the lender. I finally filed for bankruptcy in 2011. I was able to get most of my debts discharged. Now I have a stable job and I have been able to save a little money. I am wondering whether buying a home is possible after bankruptcy, and if so, what steps to do I need to take?”
Owning a home is a dream for many Americans. Unfortunately, following the housing crisis and record levels of unemployment many Americans gave up the dream. Millions of others not only had to give up the dream of owning a home but also had to take a more drastic step and file for bankruptcy protection.
Now, you mentioned that you have been able to get your personal finances in order, had most of your debts discharged, and you are ready to buy a home. Let’s look at several steps you will have to take to make purchasing a new home possible.
Steps to buying a home after bankruptcy
- Improve your credit score.
If it’s been several years since you have filed bankruptcy it’s likely that you have already taken certain steps to improve your credit score. Paying your bills on time is the most important step, but another step you can take includes reviewing your credit reports to make sure they accurately reflect the outcome of the bankruptcy proceeding.
You can also obtain a secured credit card or take out a small installment loan. By making regular monthly payments to creditors for small payments each month you can slowly build a credit history which can convince a lender that you can be trusted with larger loans.
- Review any obstacles to receiving a home loan.
Homebuyers will have to wait a specific amount of time after bankruptcy to qualify for certain types of home loans. For example, in some cases, you might have to wait 24 months after the bankruptcy discharge or three years after a foreclosure. Talk to a mortgage lender if you have questions.
Other obstacles which could be an impediment to getting a home loan after bankruptcy include tax liens owed to the IRS and outstanding judgments.
- Save money for the down payment.
One of the most important steps after filing bankruptcy and before buying a home is to save money for a down payment. Not only will saving money allow you to build an emergency fund and pay all of your bills on time, it will also allow you to put a substantial down payment on a home.
While some loans may require as little as 3% down, it’s much better if you can pay at least 20% of the purchase price as the down payment. Not only will this allow you to get a better interest rate, this can substantially lower the monthly mortgage payments.
- Carefully determine the size of house you can afford.
It’s not unusual for real estate agents to encourage clients to buy more house than they can afford. Before making any house purchase, however, it’s important to understand how much house you can really afford.
Note, homeownership is not cheap. Don’t forget to calculate extra expenses such as utilities, maintenance costs, and insurance.
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