Many people assume bankruptcy puts an end to any hopes of a secure financial future. They think a declaration of bankruptcy means giving up financial freedom and sacrificing any hope a creditor will ever extend a loan, no matter how much time passes. Fortunately, this is not the case. Many people declare bankruptcy and go on to enjoy bright financial futures. As a matter of fact, their bankruptcy is the first step toward creating financial freedom. Not only are they able to use credit cards after their bankruptcy, they can receive approval for a mortgage and own a home.
Bankruptcy does not mean you can never be a homeowner. It might even be the one thing that increases the likelihood you will one day own a home.
The most important thing to remember about bankruptcy is that it is a process. Too many people view it as a negative label, as in “I am bankrupt.” Instead, think of your situation as “I am using bankruptcy to achieve financial freedom.”
Debt to Income Ratio
Mortgage lenders consider more than just your bankruptcy filing when determining whether or not to approve you for a loan. The most important consideration is your debt to income ratio. Lenders look at the amount of money you bring in each month versus how much you owe creditors. Your outstanding debt must be low enough to allow you to comfortably afford mortgage payments each month. Ideally, your mortgage payment will be no more than 30% of your gross monthly income.
Bankruptcy actually helps you bring your outstanding debt into an acceptable range. If you are able to maintain the ability to put 30% of your income toward a mortgage payment, a mortgage lender is more likely to approve you for a mortgage.
The two things bankruptcy can affect regarding homeownership are when you can buy and what type of rate you will receive. Chances are you will need to wait a couple of years after declaring bankruptcy to buy. Banks expect you to use bankruptcy as a time to get your finances under control and they assume this will take about a year and a half to two years.
Also, you can assume you will not qualify for the lowest rate available when borrowing money for a home. You will pay more overall for the benefit of borrowing money to buy a home. Many homeowners are willing to accept that penalty if it means they get to achieve the dream of homeownership. Paying a little more is worth it to make their dreams come true.
Besides, for some people overwhelmed with large unsecured debt, the alternative of not filing a bankruptcy usually just makes the situation worse. It’s extremely unlikely that a person drowning in credit card debt will obtain a mortgage at all. Filing bankruptcy will clean the slate and a person can then start building their credit over a two year period. This will usually result in them being a much better candidate for a mortgage loan.
Obviously, every person’s financial situation is different and should be reviewed with an attorney to make sure bankruptcy is the right answer.
Are you thinking bankruptcy might be the right for you? Do you want to one day own a home, but right now your finances are in disarray? We can help. Contact the law office of Frank J. LaPerch, PC for more information about securing your financial future.