Filing for bankruptcy in California can have a significant impact on a person’s financial situation, making it difficult to obtain credit and loans. However, it is still possible to get a home loan after bankruptcy, though the process may be more challenging than it would be for someone with a clean credit history.
Understanding the type of bankruptcy
The first step in getting a home loan after bankruptcy is to understand the type of bankruptcy you filed. There are two main types of bankruptcy: Chapter 7 and Chapter 13. Chapter 7 is a liquidation bankruptcy where the debtor sells most of their assets to pay off creditors. Chapter 13 is a reorganization bankruptcy where the debtor creates a repayment plan to pay off their debts over a three to five-year period.
Chapter 7 bankruptcy typically stays on a person’s credit report for 10 years, while Chapter 13 bankruptcies stay on for seven years. It’s important to note that the time frame for getting a home loan after bankruptcy may vary based on the lender’s policies.
Rebuild your credit score
After the bankruptcy is discharged, it is crucial for the borrower to start rebuilding their credit score. You can do this by paying bills on time, keeping credit card balances low and not applying for too much credit at once.
A borrower can also consider an FHA loan, which is a government-backed loan that has more flexible guidelines for borrowers with less-than-perfect credit. FHA loans require a minimum credit score of 580, and borrowers can qualify as soon as two years after a Chapter 7 bankruptcy and one year after a Chapter 13 bankruptcy.
Another option is to work with a non-conventional lender or a community bank, as they may be more willing to work with borrowers who have recently filed for bankruptcy. They may also have more flexible guidelines for borrowers with lower credit scores.
Have a plan in place
It’s also essential to have a clear plan for how you will be able to afford the mortgage payments and maintain the property. Lenders will want to see that the borrower has a stable income, a low debt-to-income ratio, and a plan for saving for a down payment.
Getting back on your feet after bankruptcy
Getting a home loan after bankruptcy can be challenging, but it is not impossible. It’s crucial for the borrower to understand the type of bankruptcy they filed and to start rebuilding their credit score. Choose the lending option that best suits your financial situation and needs and diligently work toward buying your new home.