How To Buy A House After A Bankruptcy

A bankruptcy filing can be a devastating blow to your credit, and your emotional well-being, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage. We talk to so many folks who filed for bankruptcy have been able to obtain a mortgage!  With today’s rules you can buy a house after a Bankruptcy and get the same great mortgage rates everyone else has!

If you’re like millions of American’s the last couple of years have been tough.  People who have lost their jobs, or their houses, or their business didn’t just wake up one morning and say, “Oh, instead of making my payments, I think I’ll take a trip to Belize!” They never imagined they would be one of “those people” with bill collectors and “dings” on their credit.

While credit card companies may care about what happened before you filed for bankruptcy, mortgage companies are more interested in your recovery — what you’ve done since your filing.

You’re Not Alone! Buy A House After A Bankruptcy!

The current term being used for folks ready to buy a house after a Bankruptcy is a Boomerang Buyer.  With so many Bankruptcies and foreclosures that took place during the “Great Recession” there are a lot of folks who are now potentially able to buy a house.

Boomerang buyers are former homeowners who lost their homes over the last few years, either through short sale or foreclosure.  RealtyTrac, in a report released on Tuesday, say there are 7.3 million of them and the first wave has passed the seven-year mark after exiting home ownership.  This is, the company says, a conservative estimate of the time needed to repair credit and qualify to buy another home. 

Those eligibility rules vary, but it is possible to qualify for Fannie Mae, Freddie Mac, VA, or FHA loans within two to four years of foreclosure.  For Chapter 13 Bankruptcy, not involving a home – it can be less than 12 months of discharge.

According to RealtyTrac, the first wave of technically rebounding buyers is relatively small, about 550,000 households, representing those who exited home ownership in 2008.  The group climbs to just over 1 million in 2016 and remains over that level through 2019, peaking at 1.3 million in 2018 and finally dwindling back under a half million in 2022. 

Steps to Take: How To Buy A House After A Bankruptcy

It won’t happen over night, but there are some strategies you need to remember when you apply for a mortgage after a Bankruptcy.

➡ Have Your Ducks In A Row.  Mortgage Bankers kind of go by the “Trust and Verify” logic, meaning we need to know the “story behind” what happened – and then you need to be able to prove it.

• Give explanations. No mortgage lender is going to ignore the fact that you’ve filed bankruptcy, we need to know the cause of the filing. The Mortgage loan Underwriter will be particularly interested in whether the same situation could happen again. Your chances of being approved are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, than if it was the result of “just spending too much.”
• If the bankruptcy resulted from an event, it is important to provide us with any paperwork you have that documents the incident, such as the layoff notice or death certificate. You should also bring in court documents to indicate when the bankruptcy was filed, and when it was dismissed.
• Unlike the waiting periods for FHA, VA and even Fannie Mae after a bankruptcy – the waiting period after a foreclosure is tougher.  The waiting period is bendable, but there’s a very narrow window of what can be approved in less than 36 months. The standard USDA Home Loan guidelines require at least a full 3 years from the time that the transfer goes through.

➡ Demonstrate good money habits now. Many people who file bankruptcy swear off credit altogether, becoming part of the “all cash” economy.  In other times in your life that might make sense – however, it is important to re-establish your credit rating as soon as possible.

• Get a secured credit card or two.  Furniture and car loans and student loans are not going to impact your scores nearly as much as a couple of credit cards.   — Do NOT allow any new Collections come onto your credit file.  Make arrangements with the doctors or the phone company, but do NOT let new NEGATIVE stuff sneak on to the report.  This will kill your scores faster than any other things you can do.
• DO NOT Dispute everything on your credit report. We talked to a Veteran who wants to buy a house, First Time Home Buyer, who was referred to a “Credit Repair Company” a couple of months ago… they, of course, disputed EVERYTHING on his credit report.  They also suggested that he obtain a Secured Credit Card (which he did) and maintain a balance roughly equal to half of the credit line (which he did).  His scores went up – and he called us about getting pre-qualified to buy a house.We ran him through Freddie Mac’s Automated Underwriting System (LP) and it was referred, which means the Automated Underwriting System Flagged our request for an approval, and did not approve his application for a VA Loan – Because everything on his credit report is in dispute.  That’s what he paid the Credit Report Company to do.  I don’t think the Veteran KNEW that’s what they were disputing all credit on his credit report – but that OLD PROCESS of just disputing everything on your report is NOT going to help you get a mortgage these days.

➡ Save your money. Having some money saved up for “extra” costs associated with buying a house will help in loan approval. When you are ready to buy a house after a Bankruptcy – you CAN buy a house with literally no cash out of your pocket.  HOWEVER…  the automated Underwriting system for all types of mortgages will look “favorably” on someone who will have at LEAST one full month’s payment left over, in savings after closing.  So if your new house payment, with taxes and insurance is going to be $1280 – we’d like to see that much in savings.

• Remember, you can get a gift to help with closing costs, the seller can cover them… and, if you qualify, you can buy a house with the NCHFA Grants that are available for down payment, and get into a house with no down payment at all!

So if the bad credit, foreclosure, short sale or bankruptcy is behind you… how long do FHA and VA make you wait before you can purchase a home again? It depends on the “type” of situation you were in, and the “Extenuating Circumstances,” that caused it.  That could mean, you were in Florida, lost your job, had a Bankruptcy and a Short Sale, and moved to North Carolina to get a new job… you will need to PROVE that the reason you did a Bankruptcy and a Short Sale in Florida was due to the job loss.  You will also need to prove that the Bank that had the Short Sale is not going to come back after you for the deficiency balance (some banks do – some banks do not).

The OTHER good news for folks who want to buy a house after a Bankruptcy, is that your credit score is really just a snap shot of the last 24 months. Yes, missed payments will stay on your credit file for 7 years – but their IMPACT on your credit is greatly diminished after 24 months.

Often times we see a situation where one person on the loan has good credit, and one person has “poor” credit.  We can work with you to make that work too.

That’s why I always suggest that you meet with us (the loan officers) early in the home buying process.  We have a “credit simulator” that tells us what will happen if you close an account, or pay down a balance, or pay off a collection.  Again, we don’t suggest that you try to do this on your own… because a credit score is like a snow flake, each one is different, and each one is fragile.  You might pay off a Collection that doesn’t have to be paid!  Why waste that money when you are trying to buy a house after a Bankruptcy??

If you or your family or friends are considering purchasing another home, we know it’s a big decision.  Especially if your last experience was heart breaking.  We want to help you buy a house after a Bankruptcy (or any other credit crisis)! So, if you have questions about your credit score, or how to get ready to buy a house – please call Steve and Eleanor Thorne  919-649-5058.  We pre-qualify, and counsel borrowers everyday, and we can help you purchase a home!