Regardless of what some people might think, the vast majority of people who file for bankruptcy are not irresponsible borrowers incapable of handling their finances. A great deal of those who end up bankrupt get there because of life circumstances outside their control: a death in the family, illness, job loss, or some other catastrophe. Although it may seem like the black mark of bankruptcy will haunt you forever, that’s not actually true either. You can buy a home after bankruptcy. There are some rules and procedures set in place that you will need to deal with, but the process is far from impossible.
First of all, you probably know that there is a waiting period after you file bankruptcy before you can buy a house. Exactly how long this “cool down” period lasts depends a lot on the particular lender and/or type of loan you go with. For example, Fannie Mae, requires a minimum two-year waiting period for would-be borrowers who have filed for bankruptcy. On the other hand, the FHA maintains only a minimum one-year ban in place after a bankruptcy.
What type of bankruptcy you filed will also have an impact on how attractive you look to a potential lender. Chapter 13 is called “reorganization” bankruptcy, and it involves you repaying some of your debts back, just consolidated into a manageable monthly payment. This type of bankruptcy is preferable to lenders over Chapter 7, which involves the total dissolution of your debts. Basically, the onus falls on you to show lenders that you are a responsible person who honors their debts.
Towards this end, be prepared to have to formally explain to your lender why you filed for bankruptcy in the first place. Official severance letters, death certificates, and/or doctor’s notes all constitute acceptable documentation of why your financial situation took a downturn. If you were simply an irresponsible or careless spender, you will be expected to prove that you have changed your habits.
If you are in the waiting period to buy a home after bankruptcy, take the time to re-establish good credit. Open up a couple - not several! - credit cards, and use them judiciously. Pay off the balance every month. This will quickly do wonders for your hard-hit credit score and also serve as proof to lenders that you know how to handle your bills. It may take a little extra time and effort, but you shouldn’t abandon your dreams of owning a home just because of bankruptcy.
