Over the course of my career as a bankruptcy attorney, I have learned that most of my clients think they will have to wait until the bankruptcy drops off their credit report (10 years) before they will be able to buy a home. Nothing could be further from the truth.
The length of time you will have to wait to purchase a home will vary with economic conditions. A couple of years ago lenders were not writing mortgage loans, even for those with good credit. Lending has started to ease, but the tide could turn at any time. In short, there is no hard and fast rule concerning the length of time between bankruptcy and qualifying for a mortgage. The economic environment plays a huge factor in whether and when you will be able to buy a home.
In addition to the economic conditions, lenders generally rely on three factors to determine whether you qualify for a mortgage: (1) your FICO score; (2) your income; (3) and your ability to come up with a down payment.
YOUR FICO SCORE: Filing bankruptcy will probably improve your FICO score after a year or two. Most of my clients have poor credit scores by the time they decide to file bankruptcy. Their poor FICO scores are generally a result of late payments or high ratio of debts to equity. Your FICO score may drop immediately after you file bankruptcy, but it should bounce back and even improve within a year or two. Just make sure you don’t incur debts you will not be able to pay.
YOUR INCOME: The degree to which your income will factor into your ability to obtain a mortgage depends upon your current earnings and the length of time that your earnings have been at the current level. A lender is more inclined to give you a loan if you have been working at the same job for a while on a steady income. The lender will also consider the relationship of your income to the payments you will have to make on the house you are considering purchasing. As a general rule, you would not be able to get a loan if more than 30% of your income was going to go to the house payment.
YOUR DOWN PAYMENT: The amount you can put down towards the purchase of the house makes a big difference. The higher the percentage of down payment, the more protection for the bank.
To sum up, if you want to buy a house after filing bankruptcy, you can. You may need to wait a year or two until your income and expenses stabilize and until you are able to come up with a down payment, but that is probably a good thing. You certainly do not want to buy more house than you can afford and jeopardize your “fresh start.”