Guideline for Home Buyers Who File Bankruptcy

Bankruptcy does not end the dream of home ownership.
i Comstock Images/Comstock/Getty Images

Home buyers who have a bankruptcy in their history may find the road to home ownership a bit more difficult to navigate than the average buyer. Although a prior bankruptcy does not exclude you from home ownership, it can alter the process and create difficulties that must be dealt with.

Credit Reports

Order your credit reports from all three national credit bureaus -- Experian, Transunion and Equifax -- to see where you stand and what you can improve. Credit reports are easy to obtain through online services and you are guaranteed access to them at no cost according to federal law. Review each report as all three may have different information. Check that every account that should have been erased by your bankruptcy has been, and that there are no errors present. The simple act of eliminating false negative information can cause your scores to rise and make it easier to buy a home.

Rebuild Your Credit

Start to rebuild your credit and raise your scores with credit cards specially designed to do so. Many banks offer secured cards, or cards with small credit lines to consumers with damaged or bad credit. Use your new credit card whenever possible for day-to-day expenses, and then pay off the entire balance at the end of every month. You will be surprised at how quickly your scores improve. Paying off student loans or keeping your car loans up to date will also tend to improve scores and demonstrate your responsible approach to credit.

Federal Housing Administration

According to the Federal Housing Administration, anyone who has filed for bankruptcy is free to reestablish home buying credit after a two-year period has passed since the date of discharge. You must also have paid or made arrangements to pay any outstanding taxes due and have no outstanding creditor judgements against you at the time of application. If you have also experienced a foreclosure, it must have been at least 36 months in the past. The FHA allows buyers who meet the criteria to apply for new home loans through a qualified lending partner for FHA-backed mortgages. The loans still depend on your debt-to-income ratio and job status, but they help to make funding available to those with bankruptcies in their past.

Buying a Home

Do not expect to receive the same treatment that someone with AAA credit gets when applying for your first home loan after a bankruptcy. Lenders will justifiably be doubtful about your past defaults and cautious about your ability to pay this time around. The home you purchase should be well within your budget so that you are not stretched to the limit right off the bat. Save up and make a large down payment to demonstrate your commitment and to lower the amount of the loan. Expect higher interest rates than others may get and try your best to pay the loan down quickly to avoid paying that high interest over time. After a few years, refinance the loan to a better rate.

the nest