Steps to Becoming a Homeowner After Bankruptcy

What should you do to prepare for becoming a homeowner? 

First, do not go shopping for a house, or speak with a real estate agent until you have a loan approval (or at least a pre-approval) in hand.  This will not put you on the agents good side, however, having a full picture of your ability to obtain a mortgage PRIOR to looking at a home will.

1. Decide what area you want to live in.    Get to know what homes go for, and most of all, what the payments would be on a home of a certain size in a certain area.  This will help make your home search a much easier task.  When looking at certain neighborhoods, make sure to check crime statistics, talk to prospective neighbors, and (one thing that is a biggie for me) make sure to drive by the neighborhood at night and see how well lit it is.   There is nothing worse than moving in to an area, only to realize that you don’t feel safe walking to your door because it is too dark.  If you currently have this problem you can certainly install motion detection lights which can make a big difference.

2. Have a budget – There are many different circumstances that cause individuals to have to file for a bankruptcy. You want to make sure that after the bankruptcy you do not have any financial troubles that result in additional derogatory credit following your bankruptcy. Having a budget will help you see clearly if you need to reduce your debts or increase your income to make ends meet.

Keep this in mind.  The bank will want to see all of your monthly expenses not exceed 45% of your gross monthly income (your total income before taxes).  This includes your new prospective home payment plus all of your monthly revolving debts (but not things like your utility bills, day care, or food expenses).

3. Save Money – You will most likely need some money for your closing costs and prepaid items even if you are getting 100% financing.  This is one of the most common misconceptions when people look at “no money down” offers.  This refers to the mortgage and does not include the financing of your closing costs, which can range from 2-6% of the cost of the home depending on your credit situation and what part of the country you live in.  Also, although 100% financing sounds attractive, please know that you will always pay more money (higher rates) than if you put some of your own money down.  The reason for this is that if the bank is giving you 100% of the money, they are taking all of the risk.  If you put 5% or more down and share the risk, they will reduce your rate.  Don’t let this stop you from getting your first home however.  Go for the 100% financing if you need to, then refinance once you have built up some equity in the property.

4. Get your credit back in shape – It is important to get your credit back in shape.  The better your credit scores are, the better your rate and terms are.  Please visit the section titled, Restoring Your Credit for more detail information on restoring your credit after bankruptcy.

Other related topics:

Facts About Getting A Loan After Bankruptcy
Restoring Your Credit
Guarding Against Identity Theft

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