It is no secret that filing for bankruptcy can harm your credit. However, compared to simply letting your accounts go past due for months on end, bankruptcy may actually be better for your credit over the long term because there are no repeated “dings” on your credit score. Getting the bankruptcy finished allows you to start fresh and begin to rebuild your credit rating.
Your credit score is closely examined when you enter the home buying process, which means that filing for bankruptcy may affect your ability to purchase a home in the future. Even if your credit score is not significantly harmed, a bankruptcy discharge will remain on your credit report for up to ten years. That type of history can make lenders nervous about your creditworthiness. Nonetheless, it is possible to purchase a house after bankruptcy, but it may take some additional time and extra steps.
Don’t Become a Boomerang Buyer!
After you discharge your debts, it can be very tempting to make large purchases because you may have extra income. You should not to give in to this temptation. It will take time to rebuild your credit after a bankruptcy, and if you decide to purchase too soon, you may end up getting denied entirely or obtaining an interest rate that just does not make financial sense. Nonetheless, some buyers are so excited about the possibility of being able to afford a home that they take on high-interest rate loans, often to their detriment. Unfortunately, this practice occurs so often that there is a term for it—“Boomerang Buyers.”
Biting off more than you can chew after bankruptcy can put you in financial hot water. This type of situation is especially troubling after bankruptcy because you do not have the option of filing for bankruptcy again for several years.
The Timeline for Buying After Bankruptcy
How quickly you can purchase after bankruptcy l depends on the type of bankruptcy you filed. If you have filed for Chapter 13 bankruptcy, the process can last up to five years. This means you generally cannot purchase a house until long after your five-year repayment plan has been completed. Once you receive your discharge, most lenders will require you to go through at least a two-year waiting period before you can qualify for a conventional loan.
There are situations where you can purchase a home during your bankruptcy, but those circumstances are rare. Talk to your attorney about this possibility if that is something you are considering.
In Chapter 7 bankruptcy, your debts are discharged within a few months of filing. This means you can start rebuilding your credit virtually immediately. However, most lenders require you to go through a four-year waiting period for a conventional loan. There is generally a two-year waiting period for an FHA or VA loan as well.
There may be other loan options available to you based on your financial situation, and an experienced bankruptcy attorney can discuss these possibilities with you. Nonetheless, it is important that you take some time to figure out your new financial situation and develop a budget after your bankruptcy. This type of advance planning will help you avoid financial difficulties in the future.