When burdened with overwhelming debt and a strong desire to own a home, initiating bankruptcy can be the constructive first step. This often misunderstood step can pave the way for your homeownership dreams.
You heard me correctly. File Bankruptcy.
By wiping out unsecured debts, you can start fresh. But don’t waste your bankruptcy. Treat it as the first step to buying a house.
REBUILDING CREDIT POST-BANKRUPTCY
- Monitor Credit Reports. Check for errors. Ensure that credit reports accurately show discharged debts. Visit FreeCreditReport.com at least once a year.
- Learn to live on cash. Minimize credit card usage and rely on cash for your daily expenses. This helps you avoid accumulating new debt and demonstrates responsible financial behavior.
- Establish steady employment. Lenders prefer stability, so avoid frequent job changes
- Establish New Credit. Obtain a secured credit card, make small charges, and repay immediately. Gradually, you may qualify for an unsecured credit card.
- Pay bills promptly. Late payments and skipped payments dramatically reduce your credit score, Set up automatic bill payments or reminders to ensure you never miss a due date.
- Budget. Develop a manageable budget. Develop a comprehensive budget that tracks your income and expenses, allowing you to identify areas for saving.
- Save money. Put some amount aside every payday. Have a savings account with some cash. Having savings is also good for emergencies.
- Automobiles. If you need a car, look for one that is as modest as possible and have a downpayment ready. Steady car payments will improve your credit score.
- Improve your credit score. Aim to improve your credit score to at least 650. Our law firm, ROBERT J ADAMS & ASSOCIATES (also known as The Bill Slayer), has a post-filing program to increase your credit score to 700 and beyond. A score of 720 is realistic. And it is FREE.
- Save Money for the Home Purchase. A downpayment will help. You also need money to move, and you will likely have to buy new furniture or appliances.
Determining a Reasonable Monthly Mortgage Payment
- 28% of Gross Monthly Income: This should cover your mortgage payment, including principal, interest, property taxes, and homeowners insurance (PITI).
- 36% of Gross Monthly Income: This should cover all your debt payments, including the mortgage, credit cards, student loans, car loans, and other obligations.
Understanding the Waiting Period After Bankruptcy
- Typically, you must wait 2-4 years after a Chapter 7 discharge before qualifying for most conventional loans. However, FHA and VA loans might be available as soon as two years post-discharge, assuming you’ve reestablished credit.
Steps to Take Before Buying a Home
- Get Pre-Approved for a Mortgage: This will give you a clear idea of what you can afford.
- Determine a Livable Monthly Mortgage Payment: Include all the other costs of homeownership. (See the 28%/36% guide above.
- Find a realtor: Look for one with experience working with clients who have filed for bankruptcy.
- Avoid Predatory Lenders. There are lenders who seek individuals just out of bankruptcy with high interest rates and unfavorable terms.
Recovering from bankruptcy and achieving homeownership is possible with dedication and careful planning. By following these steps and rebuilding your financial health, you can make your dream of owning a home a reality. Remember, patience is key, and celebrating each milestone along the way will keep you motivated