Finding a home loan after bankruptcy is not difficult, but finding good terms for the loan is. Filing any of the chapter 7, 11, or 13 varieties of bankruptcy are major negative credit events which damage a borrower’s credibility, and lenders will charge accordingly. To buy a home with a bankruptcy in your history, be prepared to make a substantial down payment and to receive offers with double digit interest rates.
What Kind of Home Loan Can I Get?
A loan applicant with a bankruptcy has better odds of getting approved with a 20-25% down payment. This does not guarantee they will be approved, but the lender’s liability is lowered, and the borrower’s stake in the home is increased. Once approved, buyers will pay as much as 6.5% above the national average for their money. This is an increase resulting in thousands of additional dollars spent over the life of the mortgage, not to mention a larger monthly house payment.
Borrowers with a bankruptcy are likely to be subjected to additional fees and points as well. Private mortgage insurance is typically required, and the lender will charge extra points which add thousands to the upfront costs. Sub-prime borrowers can also be taken advantage of through high pre-payment penalties, which charge the debtor thousands if the note is paid off early. To ensure the borrower does not go from bad credit to worse home loan, compare the rates of several companies and refuse to pay exorbitant fees and points.
Improve the Situation
Without the purchasing power to buy a home outright, the buyer with a history of bankruptcy has low odds of finding a house note with favorable terms. There are alternatives, however, the best one being to wait a couple years and improve credit scores. This is also a chance to spend less on a house payment and save money for a new home.
Take action during this time and carefully examine credit reports for errors. Work on building strong histories with several creditors by opening up new credit lines and building a flawless payment history. The goal is for the future home buyer to raise credit scores, save cash towards the down payment on the house, and minimize outstanding debt.
But What If I Can’t Wait?
If waiting is not an option, and a bankruptcy is the only negative mark on the credit report, potential home buyers can still look for the best offers. Start by reviewing copies of credit reports from all three reporting agencies and ensuring the information is accurate; dispute any errors or unrecognized line items. Next, write letters to each agency requesting that items discharged in the bankruptcy be removed.
A steady job history is a necessity, and the longer the job has been held the better. Buyers should also reduce any ongoing debts as much as possible as a lower debt-to-income ratio increases the chances of getting a loan. As mentioned, a larger down payment is imperative; if savings are short, consider raising funds from friends and family or selling household items.
Whether a buyer has a good or bad credit history, they can benefit by comparing several lenders before accepting any offers. Take the time to read and understand every document, and never be afraid to ask for clarification.
This article on getting a home loan after bankruptcy was supplied by Christopher Todd from Constant Content.
Related article: How to Apply for a Personal Loan After Bankruptcy