Securing a home loan and buying a house after bankruptcy may sound impossible. However, bankruptcy has a very bad rep, painting the filer as someone who should never be loaned money.
The reality is that a lot of Kenyans get into bankruptcy every year. Most are well-intentioned, responsible people. But life has thrown them a curveball, that has left them struggling to pay off their past debts.
Sometimes, filing for bankruptcy is the only way out of a crushing financial situation. And taking this step can really help cash-strapped individuals get back on their feet.
And yes, many go on to buy a home eventually, despite the challenging credit score that results from bankruptcy. But how? Being aware of what a lender expects after bankruptcy will help you navigate the mortgage application process efficiently and effectively.
Here are the steps to buying a house after bankruptcy, and the top things you need to know.
How long after bankruptcy should you wait before buying a house?
Most people applying for a loan will need to wait two years after bankruptcy before lenders will consider their loan application. That said, it could be up to a four-year ban. This is depending on the individual and type of loan. This is because lenders have different “seasoning” requirements, which is a specified amount of time that needs to pass.
The time is measured starting from the date of discharge or dismissal of the bankruptcy action. Generally, the more time between debt discharge and the loan application. The less risky a once-bankrupt borrower looks in the eyes of a mortgage lender.
How to re-establish credit after bankruptcy
Once the bankruptcy process is over, re-establishing and maintaining creditworthiness is key to your financial health. Lenders will be looking for zero delinquencies postbankruptcy.
While you work to build new credit, don’t go overboard opening an extensive number of accounts. As this will work against you. Usually, opening just a couple of revolving credit lines and paying them in a timely manner over the course of 12 months. This helps to increase credit scores back to an acceptable level.
What to do before you apply for a mortgage
Before you apply for a mortgage loan, check your credit score by getting copies of your three main credit reports. Which detail the financial transactions (and transgressions) from your past. You will want to check these credit reports for errors, such as a credit issue that you resolved. But that is not reflected in your report.
In some post-bankruptcy cases, errors continue to report negatively on credit reports.
These mistakes will drag down your overall credit score and reduce your chances of getting approved for the mortgage. So if you spot mistakes on your credit reports, work with the credit bureaus to correct the information they include. This can boost your credit score significantly, and may even tip the scales on your home loan approval. Mortgage lenders want to see any movement from bad credit to good credit. So don’t leave any of your hard-earned progress on the table.
Buying a house after bankruptcy: Ways to woo a lender
To start the mortgage process, lenders require a detailed letter explaining why you needed to file for bankruptcy in the first place. Ideally, the bankruptcy would have been caused by an extenuating circumstance beyond your control. Such as the death of an income-contributing spouse, the loss of employment, or a serious illness.
In other words: A lender likes to see that you were hit with hard times that had a significant negative impact on your expenses or income, and made it impossible to meet your financial obligations.
What a lender won’t want to see is someone with a die-hard shopping habit or a lazy attitude toward paying credit cards on time. If that’s you, you’ll have to prove you’ve changed.
Whatever the reason you filed for bankruptcy, lenders will need to properly document your extenuating circumstances. So be prepared to provide proof detailing your life event.
Medical bills, a doctor’s note, a death certificate, or severance paperwork are all acceptable evidence that proves to lenders that you are a safe bet worthy of a home loan.