Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Home loans after bankruptcy

Dr. Don,
My husband and I recently filed a Chapter 13 bankruptcy. We have a dream to one day buy a house. I'd like to know if I will ever be able to get a loan to buy a house and how long will this bankruptcy haunt us? How much should we save for a down payment and where should we put the money?
Antonia Acclivity

Dear Antonia,
A Chapter 13 bankruptcy filing puts you in a better position than a Chapter 7 filing. A Chapter 13 filing only stays on your credit report for seven years vs. 10 years for the Chapter 7.

The difference exists because with a Chapter 13 filing you are following a repayment plan to pay off the filing's listed debts.

You won't have to wait seven years to qualify for a mortgage, but you're right to think that you'll need a bigger down payment to qualify for a mortgage because of your bankruptcy.

Allowing some time to pass helps because a prospective lender can see how you're doing with the Chapter 13 debt repayment plan. You'll get a better interest rate by waiting at least two years before you start shopping for a loan and by staying current on your bills over that time period.

Staying current is very important. The bankruptcy is giving you the opportunity to turn things around. Going forward, late payments will kill your future chances to get credit.

While you're waiting, you're also saving for the down payment on your new home. The savings also provide a financial cushion to assist you in making timely payments on your bills.

You don't want to touch this account unless you have to, but if the choice is touching the account or being late on a bill, then use the money. The larger the down payment, the less risk to the lender, which allows them to offer you a lower interest rate. The longer you wait, the more you will have saved and the lower the down payment requirement.

You'll also have to worry about the cost or availability of private mortgage insurance (PMI) given your credit history.

Where should you invest the down payment money? I think that you should use a combination of a savings account and either certificates of deposit or savings bonds -- the savings account initially to accumulate the weekly savings and then CDs once you've accumulated an emergency reserve fund and can meet a CD's minimum investment amount.

You can search for the best rates on a CD maturity, either in your area or nationwide, by using Bankrate's rate tables.

Some people have trouble opening a bank account after filing for bankruptcy. It's not the bankruptcy that causes the problem, it's any nonsufficient-funds checks or other account problems reported by your bank to a consumer-reporting agency (CRA) like ChexSystems.

This report isn't your credit report. You can get a copy of this banking consumer report by contacting ChexSystems. To find banks that don't use ChexSystems reviews to screen out new customers, go to ChexSytems Bites.

-- Posted: Oct. 10, 2001