Legal Matters

 by: Kevin Chern, J.D.

It’s true that most lenders will see you as a credit risk immediately after bankruptcy, but that doesn’t mean you won’t be able to buy a home. Home loans are somewhat less risky for lenders than unsecured loans (like credit cards or personal signature loans) because the lender will have your home as security.

Even so, every reputable lender wants to be able to expect that a loan will be repaid as scheduled. Fortunately, your credit score is based more heavily on your recent track record than the more distant past. That means that if you can start rebuilding your credit quickly after bankruptcy, control your expenses, and start showing a strong payment history, you won’t look like such a risk to those creditors.

Some studies suggest that within 18-24 months after a bankruptcy discharge, you can qualify for a loan on the same terms you would have received if you had not filed bankruptcy. In other words, most lenders will be much more interested in your down payment, the stability of your income, and the relationship between the loan payments and your monthly income than in your past financial troubles.

In shopping for a home, here are some general rules you should follow:

• Shop around for everything as carefully as you do for the house itself. Your home is likely to be the largest investment you'll ever make, so it pays to be a smart shopper. Comparison shop for your mortgage and your real estate broker as well as your home. And don’t base your decision solely on the interest rate: factors like the amount of the down payment, the length of the loan, insurance requirements, and associated costs and fees can be just as important.

• Use a mortgage broker--an independent contractor who works with several different lenders to find the best loan for you. A mortgage broker has two important things that you may not: professional expertise and direct access to hundreds of loan products. That means a mortgage broker can help you find the most efficient and cost-effective method of financing for you. Mortgage brokers have also pioneered the "subprime" credit market, using innovative loan programs to allow borrowers who have previously filed for bankruptcy to start enjoying the benefits of home ownership.

• Look for cash-back deals. Despite what you may have heard, real estate brokers' commissions are not set in stone. The real estate brokerage industry is competitive, and many brokers and real estate web sites offer cash-back or rebate programs if you agree to work with their preferred real estate agents. You may be able to save thousands of dollars on commissions with these programs.

If you’ve filed bankruptcy and you want to purchase a home, the bottom line is that you have to do your homework. That means rebuilding your credit, but it also means taking the time to research your options and get the best loan and the best terms for your particular situation. If you make that investment, you may be pleasantly surprised with your ability to buy the home you want after bankruptcy.