A lot of people think that buying a home with bankruptcy on their reports is impossible. However, that is not true. Bankruptcy is a provision (a legal provision) that was made with the intent of providing people a fresh start in their lives. So, it helps people come out of difficult financial situation that might have been a result of their financial carelessness or just due to some unfortunate event (e.g. sudden medical expenses). However, this doesn’t mean that filing for bankruptcy is a good idea. It should be your last resort really because it not only tarnishes your credibility and overall social standing but also severely limits your access to credit.
Financial factors to consider when buying a house after bankruptcy
As mentioned earlier, bankruptcy gives you a fresh lease of life. So, you need to plan well and make the best use of this opportunity to start afresh. The answer to “Can I buy a home after bankruptcy” is “Yes”. However, buying a home should not be at the top of your list really. It is very obvious that you have to first ensure that you have a regular source of income which will allow you to meet your basic needs and also provide some savings for building an emergency fund. If you are still left with money, then you could consider using it towards paying your monthly mortgage installments and accordingly fix a budget for buying a home in bankruptcy.
Another important factor to consider is the type of bankruptcy you were granted. This will determine whether your entire debt was settled right away (as in Chapter 7 bankruptcy) or was your debt reorganized (as in Chapter 13 bankruptcy). In the latter case, you will still have your debt obligations to fulfill… so, you will need to take a call on whether you will be able to take on the additional burden of home loan installments (and more importantly, how will you muster enough money for the down payment). Also note that it is almost impossible to get a loan if your bankruptcy is not fully discharged.
Finally, you need to decide on when exactly you can afford to buy a home after bankruptcy; and what are the financing options available to you for buying a home in bankruptcy.
How to buy a home after bankruptcy? What are the available options?
The obvious option that comes to mind is getting a bank loan. And it will translate into a mortgage loan i.e. a secured loan against the home that you buy. Other secured-loan options could be possible too but in most cases they will not be available to you (a person who has just gone through bankruptcy).
Even for home mortgage loan, you must qualify as per the criteria defined by the bank in order to get the loan. Generally, the banks will consider your home mortgage loan application only after certain period of time (mostly 2 years) has elapsed since your bankruptcy. The bank will make the usual checks (including your credit report) and will additionally look at various factors like – do you have a regular source of income since last 1-2 years, whether you have been paying all your bills on time (and in full) and your credit history for the time period after your bankruptcy.
Another option that you could consider is “Land contracts” or seller financing. In this option, the seller acts as the lender for you. You enter into an agreement with the seller to make a down payment and pay the remaining amounts in installments over a period of time. There are various ways in which land contracts are drafted and it is best (both for the seller and buyer) to seek advice from a real estate lawyer for getting the land contract drafted. Since you will find it tough to qualify for home loans from institutional lenders you might resort to land contracts. Moreover, land contracts generally offer more favorable loan terms and interest rates for the buyer.
In any case, you should seek advice from a seasoned real estate professional/lawyer that deals in such matters as buying home after bankruptcy.