If you had to file for Chapter 7 Bankruptcy, don’t worry, you aren’t alone. Millions of Americans have to file for this BK in order to get the fresh start that they need. It’s how you conduct your finances after the discharge of the Chapter 7 bankruptcy that will determine your ability to buy a house in the near future
The Waiting Period
Each loan has a different time you must wait before you can buy a home after a Chapter 7 BK. Typically, you can expect to have to wait two years after the discharge of your bankruptcy, but the USDA loan does require a three-year waiting period.
It’s what you do with your finances during this time that will determine if you can get a loan after filing for bankruptcy. Remember, the waiting period doesn’t begin until the discharge of your bankruptcy. This isn’t when you filed for BK; it’s when the judge officially dismisses your debt.
Fixing Your Credit
Chances are that your credit score fell considerably when you filed for BK. That doesn’t mean it will stay that way forever, though.
First, you have to establish credit again. You probably don’t have any credit left after you file for BK. The best type to start with is secured credit. With a secured credit card, you have to put money down on it. Let’s say you put $500 down on a card. That becomes your credit line. The credit card company holds onto your $500 in an escrow account. You are then free to use the credit card as you need. If you ever default on the card, the credit card company can keep your security deposit and will close the card.
If you do get a secured credit card, do your best to pay off whatever you charge each month. This way you don’t carry a balance, but you should the credit bureaus that you can handle your credit lines. You should do this for at least six months before moving onto the next step.
Once you establish your financial responsibility, you can start applying for unsecured credit cards and/or personal loans. Make sure that you only apply for one type of credit at a time and spread it out over a series of several months. You don’t want to get in over your head in debt, but you want to make sure that you can establish a credit score by showing responsible use of your credit.
The quicker you start this process after your BK discharge, the faster your credit score will improve.
You’ll need to put money down on a home after BK with the exception of the USDA or VA loan. If you want FHA or conventional financing, you’ll need some money down. Even if you do qualify for the VA or USDA loan, you still may want to make a down payment. This lets lenders know that you have recovered from the incident that made you file BK and that you are willing to invest your own money into the loan.
If you want an FHA loan, you’ll need at least a 3.5% downpayment. Conventional loans require a 5% down payment. You should try to aim for a down payment that is greater than the minimum requirement, though. Lenders look at this as a compensating factor that can make up for the riskiness that you pose as a result of filing for BK.
Stabilize Your Employment
You’ll also want to have stable employment when you apply for a mortgage after BK. Lenders look for consistency and reliability in your life, especially as it pertains to your employment. They want to know that you have employment that will continue for the near future.
They also want to see that your income is stable. If you changed jobs frequently over the 2-year waiting period, it doesn’t’ show reliability. Lenders want to know that you’ll be able to pay your mortgage easily without the risk of losing your job or not making the same amount of money throughout the year.
Write a Letter of Explanation
If there’s one thing that can change a lender’s mind, it’s the Letter of Explanation. It’s obvious since you filed for a Chapter 7 Bankruptcy, that you had financial issues. But why did you have them? Lenders will only assume the worst unless you provide them with an LOX.
The letter should discuss the situation that led to you filing for BK and what you’ve done to improve your situation. Lenders want to hear from your perspective what happened. For example, did your company close? Did you fall ill? Did a partner fall ill? These are things that you can easily explain and prove to show the lender what you went through as well as how you’ve recovered from it financially.
Once you maximize your chances of getting a mortgage after a Chapter 7 BK, you can start applying. We suggest that you apply with several lenders as each will have their own requirements regarding getting a mortgage after you file for Chapter 7 BK. Some lenders may not entertain the idea at all, while others will welcome it as long as you’ve picked up the pieces and started fresh.