How to Buy a House when Bankrupt

Two Methods:Getting a Mortgage After BankruptcyGetting a House Without a Mortgage

Most people take out a mortgage when they want to buy a house. Mortgage lenders will check your credit, income, debt and expenses before they offer you a loan to buy a home. If you are bankrupt, the chances of qualifying for a mortgage are not good. Being bankrupt will not preclude you from buying a home after a few years of rebuilding your credit, but if you are in the process of declaring bankruptcy or recently settled your debts through bankruptcy, you will probably not be able to finance a home loan.

Method 1
Getting a Mortgage After Bankruptcy

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    Recognise that you will have to wait. If you have been through a bankruptcy, you should be patient and try to rebuild your credit and financial security before making a major purchase, such as a house. Think carefully about whether or not this is best move for you make right now, and be prepared to spend some time getting your finances n order before making a big financial commitment.[1]
    • If you filed for a Chapter 7 Bankruptcy, you will generally have to wait four years before you can apply for a conventional loan, or two years for FHA or VA financing.
    • If you filed for a Chapter 13 Bankruptcy, you will only have to wait two years for a conventional loan. For FHA or VA financing you may be able to get a loan after a year.[2]
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    Determine the eligibility for FHA and VA loans. FHAs and VAs are government backed loans that you may be able to apply for if you can demonstrate that you have made all payments on time for a year after bankruptcy, and have your finances in order.[3] If you filed for Chapter 13, you may be able to get a FHA loan after just a year if you meet the following criteria:
    • Your bankruptcy was caused by circumstances beyond your control, such as a medical emergency.
    • The circumstances leading to your bankruptcy are unlikely to recur.
    • Your income was reduced by at least 20% for six months.[4]
    • You may also require permission from the court before you are eligible to take on more debt.[5]
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    Rebuild your credit in the meantime. After filing for bankruptcy you should begin trying to rebuild your credit to give you the best chance of accessing major financing, such as a mortgage, in the future. You need to prove that you are a responsible debtor.[6] After discharging all the debts in your bankruptcy you should be able to get a credit card, but you will often be charged a high rate so you should be careful.
    • If you can’t get an unsecured card, try and get a secured one which you can later convert to an unsecured one.[7]
    • If you get a new card be sure to manage it carefully and stay on top of all your payments. Making payments on time and in full will help you rebuild your credit.[8]
    • Don’t max out your cards, and take it slowly to avoid getting into difficulties.[9]
    • You can also build up your credit rating by buying something on credit from a store, but be sure you can afford it and won’t miss any payments.
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    Plan your finances. Once you back on track you need to thoroughly plan out your finances for the future. This means making a budget and sticking to it. If you going to secure a mortgage you will need to demonstrate to a lender that you are on top of your finances and you will be able to make all the payments. As well as building your credit score, try to save up in preparation to make a large down payment.[10]
    • If you have been bankrupt, lenders might consider you a greater risk and require a large deposit in order to approve a mortgage.
    • Showing that you have successfully saved up money in the previous years also demonstrates effective budgeting and management of your personal finances.
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    Prepare for a mortgage application. Once the required two or four years have passed and you have been steadily repairing your credit rating, you may want to approach a lender about a mortgage. Be sure you fully prepare and be ready to answer difficult and personal questions about your bankruptcy, as well as what you have done in the intervening years. Lenders will be looking for you to meet certain criteria to consider you a good borrower. These might include:
    • A good debt-to-income (DTI) ratio. This is calculated by dividing your monthly debt payments (including mortgage, car loan, and other payments) by your monthly income. While borrowers can have a DTI as high as 0.43 and still quality for a loan, lenders prefer this measure to be under 0.36.[11]
    • Stability in employment and your life.
    • Money in the bank, or other assets.
    • A retirement plan or 401(k).[12]
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    Consider professional advice. If you are rebuilding your finances after bankruptcy, you may find it helpful to talk to a specialist in personal finance to get some advice on money management. Sometime people with bad credit end up taking up loans from subprime lenders and payday loans companies which can end up costing you an awful lot.[13]
    • Somebody with particular knowledge may be able to help you avoid these potential dangers.
    • Look online for accredited debt counselling services in your area.[14]

Method 2
Getting a House Without a Mortgage

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    Borrow from friends or family. One way to get a loan without waiting the two or four years a financial institution would require is to ask friends or family if they will help you. You are not eligible for a mortgage, so the person would have to buy the house and then you would pay them the mortgage payments. After two years, or when you become eligible, you may be able to take over the mortgage.
    • This is not a decision which should be taken lightly. Only ask if you are completely certain that you have a steady ongoing income, and will be able to meet the costs.
    • Consider the fact that if you fail to pay off the loan, your friend or family member will be liable for your payments. This could affect their credit or damage their financial stability.
    • If you do progress with this you will need to document everything and have clear written agreements on the rates and payment schedule.[15]
    • You may need to complete the promissory note and mortgage agreement to ensure the deal is legal and all parties are protected.
    • Seek legal advice to ensure you do not run in trouble which could ruin your relationship.[16]
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    Consider a rent to own option. Several websites provide listings of rent to own homes in every area. Pay a deposit on a house you want to buy, which is still owned by someone else, and agree to an overall purchase price. Pay the owner rent every month, and all or some of that rent money can be used towards a down payment on the house you are living in.
    • Build your credit, and when you are able to get a mortgage, the owner of the house can sell it to you at the price you initially agreed to.
    • The owner can use your rent as a down payment.[17]
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    Ask about seller financing. Seller financing is similar to rent-to-own, but the buyer owns the house and the seller provides them financing. That is, instead of getting a mortgage from a financial institution, the seller lends the buyer money to purchase the house. Of course, the seller is subsequently repaid by the buyer with regular mortgage payments. However, many seller financed mortgages are short-term and have a balloon payment due at the end. This means that the buyer should find a way to refinance before the term is up.[18]
    • Seller-financed mortgages are often a good way to get a loan when traditional loans are unavailable to you. However, the risk taken by the seller in lending to you means that interest rates charged on these loans are typically high.
    • Refinancing within the loan term is essential. If you can't secure another mortgage within this time, you will be stuck with a very large balloon payment and no way to pay it off.[19]
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    Pay with cash. One way to buy a house after bankruptcy without waiting until you are able to get a mortgage, is to buy a house without a getting mortgage at all. If you have the cash to purchase an inexpensive house outright, then you can do this. This is not particularly likely, but if you find an opportunity and have the money, you can do it.
    • Avoid the temptation to take loans, even small ones, from subprime and payday lenders to support a purchase.
    • They may be more willing to lend to you despite your credit rating, but it is a big risk.
    • Opt for a more patient approach to rebuild your credit and secure your financial future.

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Categories: Mortgages and Loans