Can I buy a home after filing for bankruptcy?

Bankruptcy can lead to future financial security. Here is one way to take that first step.

Bankruptcy offers a fresh financial start. Depending on the chapter chosen, the petition can result in discharged or forgiven debt or a repayment plan. In either case, with careful planning the petitioner can purchase a home after bankruptcy.

Three steps to take before purchasing a home after bankruptcy

First, it is important to review your credit. Get a credit report and note your credit score. Lenders will review this score when you apply for a mortgage. As such, it is important to take the next step and work to rebuild your credit immediately after bankruptcy. A previous piece, available here, provided some tangible ways to achieve this goal. A few examples include promptly paying bills and wisely using credit.

When making their determination, lenders generally consider a credit score between 580 and 669 as a fair score. Those with a credit score that falls within this range may face higher interest rates compared to borrowers with a higher score. You can increase the odds of a mortgage with a better interest rate by agreeing to a higher down payment.

If a traditional lender is not offering a favorable rate, consider an untraditional lender. Instead of counting on a local bank, a mortgage broker or private lender may provide a better interest rate. Mortgages backed by the Federal Housing Administration (FHA) are also an option, but can come with drawbacks. Examples include a required upfront mortgage insurance premium of 1.75 percent of the value of the loan as well as monthly private mortgage insurance premiums.

Although it is wise to purchase a home that fits within your current budget, keep in mind the potential to refinance in the future. Work to build up your credit score and you may be able to get a better interest rate in the future.

Finally, get all needed paperwork in order. Lenders may need to review pay stubs, tax documents and other financial information before they offer a mortgage. Although electronic records are helpful, it is often best to have paper copies of the documents when applying for the loan.

A successful bankruptcy can serve as a catapult into future financial stability

Those who are considering bankruptcy relief are wise to take the process seriously. An attorney experienced in this matter can discuss the pros and cons of the process and help you find a debt relief option that works best for your situation. With the right approach, bankruptcy can help better ensure future financial stability.