Filing for bankruptcy is often the only chance you have when it comes to getting proper debt relief. Of course, going bankrupt to restart your financial life is never a fun process. Since you probably didn’t make your payments on time, chances are your credit report needs some serious work.
With a recent bankruptcy on your credit report, even getting a credit card can be difficult. There are other hurdles you will encounter, such as obtaining personal loans after bankruptcy for medical expenses or having only limited mortgage options. This might lead you to ask yourself: can you buy a house after bankruptcy?
You can (but there are some pitfalls!). Let’s take a look to see what options are available to you.
Credit after bankruptcy
Filing for bankruptcy can wreak havoc on your financial record, even if you started out with excellent credit. You will see your credit score drop instantly by 100, 150 or even more than 200 points!
Having bad credit makes it impossible to get most types of loans, leaving you with a limited number of private lenders to work with. Unfortunately, many of the private loans available to those with low credit scores are APR nightmares, with a high monthly payment.
For example, let’s look at the rates of OppLoans, a company that offers private loans to people with bad credit. Although your loan application may be approved, the loan will probably not be worth the debt you will incur. OppLoans’ ARP loan terms vary widely, ranging from as low as 59% to as high as 160%!
Let’s say you had $10,000 in medical debt that you wanted to finance over three years. With an APR of 160%, you will end up paying $48,536.03. Of this total, only $10,000 is the financed amount; the remaining 38,536.03 are all interest!
To avoid filing for bankruptcy again in the future, it is essential that you avoid taking out these types of high interest rate loans with exorbitant payment requirements. Likewise, once you’ve secured a mortgage, it’s important to make sure your monthly mortgage payment amounts are sustainable over the long term.
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Can you buy a house after bankruptcy or do you have to wait?
First, you will have to wait for your bankruptcy attorneys to put everything in order. Immediately after receiving a bankruptcy discharge, you will not qualify for any type of mortgage.
You will have to wait a bit before you can get a mortgage. How long you will have to wait depends entirely on your type of bankruptcy filing. Let’s see how filing different types of bankruptcy can affect your financial calendar.
Chapter 7 Bankruptcy
The applicable waiting period for obtaining a loan after Chapter 7 bankruptcy depends on the type of mortgage you are trying to finance. To qualify for loan programs offered by private mortgage companies, you will need to wait at least 4 years before applying for a mortgage.
However, you will be eligible for public loans before you are eligible for private loans. USDA loans require you to wait three years; there is a two-year waiting period for FHA and VA loans.
Chapter 13 Bankruptcy
The legal process is a little different for Chapter 13 bankruptcies, as is the waiting period. How long you will have to wait to get a loan after Chapter 13 bankruptcy depends on whether your bankruptcy is dismissed or discharged.
- If your bankruptcy is firedthen there is a four-year waiting period before you can apply for a conventional mortgage.
- If your bankruptcy is dumpyou will then have to wait four years from your filing date and two years from your credit application before applying for a conventional mortgage.
Fortunately, getting a government guaranteed loan won’t take that long. USDA loans require a one-year waiting period; you are eligible for FHA and VA loans immediately upon rejection or discharge from bankruptcy!
The Long-Term Effects of Bankruptcy on Credit
The bankruptcy process is extremely damaging to your credit, remaining on your credit report for 7 (Chapter 13) or 10 (Chapter 7) years after the filing date. As mentioned above, this will significantly limit the loan type, terms, and APR you are eligible for. You probably won’t meet the minimum credit score requirement for many loans.
Even if you meet their credit requirements, it is essential to avoid creating unnecessary credit accounts after filing for bankruptcy. If you do it anyway, now is a great time to develop good credit habits. Never finance more than you can afford with your monthly payment and avoid late payments.
Build credit while waiting
Paying your bills on time is important. You can help improve your credit history by paying on time, but most bills don’t affect your credit score. Fortunately, there are lines of credit specifically designed for this purpose.
Opening a secured credit card will allow you to improve your credit without having to apply for conventional loans. Unlike unsecured personal loan debt or traditional credit cards, secured cards only give you a credit limit based on the amount of your deposit.
These are basically debit cards that work like credit cards! Using a secured card will help you avoid excessive debt on your credit card because your initial limit will not be higher than the amount you can afford to deposit.
These credit card companies always report your payments to the credit bureaus, allowing you to build up your credit for future loan approval and more affordable mortgage payments.
If you’re hoping to finance a home after bankruptcy, you need to improve your credit before you can start looking at the different types of mortgages.
A way to build your wealth
If you can afford it, investing is a great way to amass wealth while waiting for the waiting period to pass. Even if, during the waiting period, you will not be entitled to a mortgage, this does not prevent you from making a real estate investment!
You can start investing in real estate using services such as Fund raising for as little as $500! If you have a little more in the bank, yield street is an option that has historically offered investors an annualized net return of 9.71%.
Online crowdfunding services like these make it easy for you to start making real estate investments. These types of investments often generate excellent returns over 5+ years, aligning well with mandatory waiting periods and setting you up for success.
Can you buy a house after bankruptcy? : What we have learned
Yes, you can buy a home after bankruptcy, but it takes effort, time and planning. You will need to open multiple lines of credit, establish a positive credit history, and meet your credit limit to improve your credit.
Once the mandatory waiting periods have passed and you’ve established an excellent credit rating, you’ll be able to get a much lower monthly mortgage payment. Although this process takes a long time, it is worth the wait. Build your credit, invest appropriately and save when possible; you can finance your next home soon enough!
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