Buying a Home After Bankruptcy

Home ownership is generally considered an integral part of the American Dream, but when the U.S. housing market collapsed in the late 2000s, millions of consumers experienced the nightmare of bankruptcy. While a bankruptcy serves to reduce or eliminate most of your debt, it remains on your credit report for seven to ten years 1, impacts your credit score,  and makes it difficult—though not impossible—to qualify for a mortgage.

Now that the U.S. economy has recovered and the unemployment rate is approximately 5 percent 2, many consumers are ready to get back in the home ownership game, but what does it take to qualify for a mortgage after you’ve experienced a bankruptcy? Lenders may require that consumers wait at least two to four years after a bankruptcy is discharged before applying for a mortgage. That said, during the mandatory waiting period, follow these suggestions to raise your credit score and show potential lenders that you are once again creditworthy.

Check your credit report regularly and correct mistakes

By law, you are entitled to one free credit report per year from each of the “big three” credit reporting agencies (CRAs): Equifax, Experian and TransUnion. At www.annualcreditreport.com you can decide to order all three credit reports at the same time or order one now and others later. The advantage of ordering all three at the same time is that you can compare them. On the other hand, spreading out your requests can help you keep track of any changes or new information that may have been added to one or more of your reports.3

Look for debts that were repaid or discharged in your bankruptcy; they shouldn’t appear as unpaid debt after the bankruptcy is completed. Also, check for mistakes, such as information that belongs to someone else or is otherwise incorrect or outdated. Report inaccuracies immediately to the CRA, dispute the mistakes and ask that your report be corrected.

Pay your remaining bills on time

The way you manage your remaining bills after your bankruptcy discharges will be reflected in a growing credit score, which will show potential lenders that you are rebuilding.

Rebuild your credit history

While it may seem counter-intuitive to apply for a loan or credit card after a bankruptcy, a secured credit card and/or manageable installment loan are two good ways to begin reestablishing a credit history. Backed by a deposit equal to the credit limit, a secured card gives you the credit benefits you need without the risk of going back into debt.  Installment loans such as car loans, which are paid monthly, are also an indicator of your creditworthiness. Payments are reported to the CRAs, and slowly add up to a positive credit history as long as you always pay on time.