Many people faced with bankruptcy operate under a number of misconceptions about the law and its impact. One common misconception is: If you file for bankruptcy, you will never be able to buy a house in the future.
Not true. Lenders will look at your past and use the bankruptcy as a factor to assess the loan’s risk. Mortgage lenders will try to determine if it has been long enough since your bankruptcy for them to see your current credit worthiness. Some lenders may look at what caused your bankruptcy and ask for a letter explaining what led to your decision to file bankruptcy.
Many of my clients who file bankruptcy are not irresponsible but unlucky. For clients who intend to purchase a new home as soon as possible or who worry about losing their security clearances, I often recommend writing a letter to themselves before the file bankruptcy or shortly afterwards. Two years or more from now when the underwriter or security manager asks you why you filed bankruptcy it may be hard to remember all the details. If you write the letter now, it will be easier to get all the little details down while they are fresh in your mind. You can then rewrite the letter in the future and remove any emotionally charged information or unnecessary details.
Your first mortgage loan after bankruptcy may have a higher interest rate, the lender may require you to pay for mortgage insurance or they may require a larger down payment. The lender may see you as a higher risk due to your prior bankruptcy or your credit history prior to filing the bankruptcy.
Some of my associates in the lending field recommend a couple options that will help reduce the impression that you are too high a risk: First, plan to have a larger down payment than is usual, or second, buy less house than you can really afford. Having more than enough income to make the mortgage payment is one way to reduce the bank’s perception of you as a risk. Instead of a mortgage payment of $1500/month, which you could technically afford, try for a $1200/month payment. In addition, if you do get a higher interest rate or mortgage insurance added in, you can focus on refinancing in the future after demonstrating your ability to pay a mortgage on time.