Can I Buy a House After Bankruptcy?
Yes, you can buy a house after filing for bankruptcy. Bankruptcy does not restrict subsequent ownership rights. What bankruptcy does, however, is adversely affect your credit rating, and it stays on your record for up to 10 years. Therefore, it will be extremely difficult to obtain a conventional mortgage loan from a bank or other lending institution until you rebuild your credit. This process normally takes between 12 and 24 months. One way to short-circuit the process is to convince a seller to finance your purchase for you. A bank may not view you as a good credit risk after bankruptcy. But under certain circumstances, a seller may view you as an ideal candidate.
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Instructions
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Find a seller who is willing and able to owner-finance for you, allowing you to purchase his or her property without going to the bank for a loan. The seller takes back a mortgage and a deed of trust against the property, and you make your monthly mortgage payment to him or her. For this option to be possible, the seller must be in possession of a house that is fully paid for. Retired or elderly people may be ideal sellers. In this stage of their life, they may prefer an income stream as opposed to a lump sum payment. Note that the seller may charge you 12 percent interest or more. If he puts his purchase money in a savings account in the bank, he might get a 5 percent return.
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Try to construct the deal using as little up-front cash as possible. Any sizable down payment you make is highly at risk until you are sure that you will be able to refinance your purchase at some point in the future. If you are unable to because of your credit, and you are foreclosed upon, your down payment will be lost.
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When you set up the purchase, try to postpone paying off the seller for as long as possible. In other words, the seller will want his purchase price funds at some point. This is normally anywhere from one to five years in the future. Make sure you give yourself ample time to rebuild your credit before you go to the bank or other conventional lender and attempt to refinance your owner-financed purchase.
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Rebuild your credit as you go. The day will come when you need conventional mortgage financing to pay off the owner.
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Tips & Warnings
Owner-financed properties are not always easy to find. A starting point is under "Real Estate for Sale" in the newspaper classifieds. You can also drive around and look for "For Sale By Owner" signs. Generally, where a real estate agent is involved, owner financing will not be possible because the agent will require her sales commission in cash. When driving around, also look for abandoned and neglected properties. These properties may be owned by an elderly person who is being cared for elsewhere. An owner-financed situation with an income stream may be the perfect vehicle for both buyer and seller.
Beware the balloon payment clause. At some point in the future, you will be required to refinance your owner-financed purchase with a conventional loan. Try to give yourself five years to rebuild your credit before you have to attempt this feat. If the balloon payment is due after the first or second year, you may well still be in the process of rebuilding and you may not be able to refinance. Don't cut yourself short on this point.
An owner-financed purchase will almost always be on an as-is basis: there will be no warranties on the plumbing or heating system, for example.
Resources
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