How to Buy a House After Bankruptcy

By Teo Spengler
bankruptcy, you, improved credit, a home loan
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Nothing in the U.S. Bankruptcy Code prevents you from buying a house after a bankruptcy case is finished. The obstacle is not legal, but practical. Unless a rich aunt is about to send big bucks your way, you'll have to persuade someone to give you a loan. Since bankruptcy stays on your credit report for a long time, you'll need to make yourself more attractive to a lender in other ways.

Bankruptcy Torpedos Your Credit

If you have a good credit score before filing for bankruptcy, expect it to take a big hit whether you file for Chapter 7, which wipes out your debt, or Chapter 13, which reorganizes it. If you have a bad credit score, it will still fall off the cliff but the drop won't seem as steep. Lenders aren't eager to give more money to a debtor who couldn't handle prior loans. Bankruptcy can remain on your credit report for a decade under the Fair Credit Reporting Act, and shows up even beyond that in some cases.

Bankruptcy Wipes the Slate Clean

Before you get too discouraged, remember that bankruptcy can clean up bad credit too. Under the Fair Credit Reporting Act, your bankruptcy is listed on your credit report, but all of the debts that were discharged in the action disappear. They not only show a zero balance, but all of the prior loan history vanishes with the balance. So if you had years of late payments on credit card debt that was discharged in bankruptcy, all of those late payments should no longer appear on your credit report.

Double-Check Your Credit After Bankrupcy

You have every incentive to make sure your credit report complies with the Fair Credit Reporting Act after bankruptcy if you envision buying a house. Your credit can be unnecessarily damaged if debts are still being reported as past due, in collections or charged off when they have been discharged. Several months after your bankruptcy case is finalized, obtain copies of your credit report from all three credit firms: TransUnion, Equifax and Experian. Make sure that creditors have not reported any discharged debts as currently owed, late, delinquent, or converted to a new type of debt. If these inaccuracies appear, send in a written dispute to the credit agency, outlining each inaccuracy. Credit agencies are legally obligated to investigate your claims within 45 days or correct the report within three days of receiving the dispute.

Start Rebuilding Credit Immediately

You don't have to wait until the 10-year period is up to begin shoring up your credit score. You do this after bankruptcy in the same way you do it before: by having steady employment, applying for only a few credit cards wisely and paying them off monthly. Most general lenders want to see two years of problem free on-time payments before considering making a loan. Other strategies include saving up a large down payment and getting someone to cosign on your loan. The mortgage lending industry is extremely competitive, and some brokers specialize in helping people who have been through bankruptcy find house loans. Look around and compare rates before you sign on the dotted line.