Can I Finance a Home After Bankruptcy?
Financing a home refers to getting a mortgage from a lender in order to purchase a property. Under normal circumstances, you would review lenders and choose one to apply to for a mortgage. But if you are recovering from a bankruptcy and want to buy a new house, you may have difficulty getting any type of financing, especially for such a large purchase. While bankruptcies make the process difficult, they do not make it impossible, and if you are determined or do not mind waiting, you will be able to finance a home after your bankruptcy.
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Getting a Home Loan
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A bankruptcy does not actually restrict you from getting a home loan, but it may make you jump through a few extra hoops. If you have a Chapter 7 bankruptcy that has officially discharged your debts and ended, you can pursue financing on your own. But if you are still under a Chapter 13 payment plan, you must get approval from the bankruptcy court for your home loan, along with other major financial actions.
Credit Difficulties
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The difficulty in financing after bankruptcy is not restrictions made by the court but your current credit standing. Defaulting on loans, a common path to bankruptcy, quickly lowers your credit rating, but bankruptcy drops it even more. A bankruptcy can make your credit score fall by hundreds of points, aside from the effect it will have showing up on your credit report itself. Lenders, seeing both the low score and the bankruptcy recorded, will typically refuse your attempts at financing. Hard money lenders may still be willing to accept you, but they will charge very high interest rates in return for their services.
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Waiting Periods
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As a result, your best bet for financing a home is to wait until your credit has recovered. You can aim for two different goals. If you want to finance soon, you can aim to increase your credit score by making reliable bankruptcy payments and managing credit carefully. Then after one to two years, major lenders will be willing to consider giving you a mortgage. If you want the bankruptcy completely removed, you will have to wait up to 10 years before it disappears from your credit report.
Bankruptcy Alternatives
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If you have a choice to work out a compromise other than bankruptcy with your lenders, you may want to consider it to save your credit, but be careful. Not all compromises are better. Foreclosures, for instance, can drop credit scores by as much as bankruptcies. Debt restructuring can help you salvage credit but only if you can make all your new payments reliably. Having a strict budget is key.
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