Buying Your First Home After Bankruptcy
Bankruptcy does not change the process of buying a home. Lenders do not have special “bankruptcy loans” for people with bankruptcy on their credit. Buying a home after bankruptcy is no different for you than for anyone else.
Certain government-backed loans have a rebuilding period after bankruptcy in order to qualify. For instance, Federal Housing Administration (FHA) credit guidelines require the debtor to show two years of responsible credit management after the bankruptcy discharge before it will issue a federal guarantee on a home loan. Your banker can help explain any restrictions or limitations on federally guaranteed loan qualification.
The traditional down payment for a first home purchase is 10 to 25 percent of the purchase price. The more money you put down, the better your interest rate becomes, and the cheaper your monthly payment. For a $200,000 home, that makes the down payment $20,000-50,000. Veterans Administration (VA) Loans available to veterans require nothing down. FHA Loans guarantee your loan and requires only a 3.5 percent down payment. Fannie Mae and Freddie Mac Loans require a three percent down payment.
Most lenders require private mortgage insurance (PMI) on any loan with less than a 20 percent equity in the property. That can mean a down payment, a great purchase price, or a combination of the two. The PMI payment is insurance to protect the lender, and does not pay off your loan.
Improve Your Credit
Lenders base your mortgage qualification on a variety of factors, including your income and assets, your debt-to-income ratio, your pattern of savings and your job stability. But the most important factor in today’s tightened credit world is your credit score. Lenders tie the interest rate you must pay to your credit score, so that borrowers with a score of 720 and sometimes 740 and above are the only ones who will pay the lowest mortgage rates. Borrowers with a credit score below 620 may not qualify at all for a mortgage until they can improve their score.
Speak with the Bank
By pre-qualifying for a loan, you will know exactly how much you can borrow and your expected interest rate. Your lender will explain closing costs and fees. At this point it pays to shop around for the best deal. In some cases fees and closing costs can run into the thousands.
Find a Realtor
Your real estate agent will help you locate the ideal home that you can afford, and will represent your interests during negotiations. The seller pays a real estate sales commission of four to six percent. This commission is shared between the seller’s agent and the buyer’s agent. Consequently, there is no down side to having a buyer’s agent. No, the seller’s agent will not split the commission with you if you don’t have an agent.
Make a Reasonable Offer
Your real estate agent can help you through the process of making a reasonable offer. Homes are generally priced to sell, so the negotiation often comes down to just a few thousand dollars. However, there may be other issues like repairs or improvements that the seller is able to provide at a discount. This is especially true when negotiating with the builder as seller.
Have a Home Inspection
Never buy a home without having it inspected. Not only are you looking for serious flaws in the home, but you can learn a lot about home maintenance and what to expect in terms of repairing or replacing systems and appliances as an owner.
Get a Draft Copy of the Closing Paperwork
The actual closing process is always a hurried process and the legal documents are intimidating. Ask for a copy of all of the paperwork so you can be sure you understand the terms before you sign. You may also want to discuss any uncertainties with an attorney for clarification.