Buying a home after bankruptcy

Sadly for many Australians, hard times bring about the need to file for bankruptcy. In the September 2014 quarter alone, there were 7466 instances of personal insolvency nationwide, according to statistics from the Australian Financial Security Authority (AFSA).

However, filing for bankruptcy doesn’t mean you are forevermore excluded from the property ladder – it’s simply a matter of knowing how and when to get back on.

Income

One of the first things to do if you’re looking to buy a property as you recover from bankruptcy is to maintain a steady income. This will include saving a regular portion of your income to build up your deposit and show your future lender that your financial situation is once again cash-positive. Steady employment, preferably fulltime, is the most obvious means of achieving a steady income stream. You may also find it more beneficial down the track to stay with the same employer rather than take a series of short-term jobs.

Credit score

Once you have established a steady income source and savings plan, the next step is to manage your credit score. This is the rating used by lenders to determine who they will lend to, how much and at what interest rate. Although you generally can’t remove items such as a bankruptcy from your credit report, you can ensure the information on it is accurate. This includes the details of your bankruptcy, especially the dates, debt amounts and list of creditors.

You can also make sure that you are not being wrongly penalised by incorrect listings, duplications or debts that have already been settled (such as overdue utility bills). Additionally, get your financial affairs in order as soon as possible to present a stronger case to lenders once you do want to buy property again.

Non-bank lender State Custodians suggests a few simple things you can do to improve your credit report:

• Pay your bills on time
• Maintain a regular savings plan
• Save a sizeable deposit
• Hold down stable employment

When to buy

Carefully plan out when you’ll be able to buy. As the AFSA points out, records of a bankruptcy can remain on your credit report for five years or more, despite bankruptcy itself generally lasting only three years. The length of record also depends on the type of bankruptcy, the amount of debts accrued and whether you were declared bankrupt voluntarily or involuntarily. It may still be possible to obtain a mortgage with your bankruptcy still on file, but you should expect to pay a higher interest rate and additional fees, pay a higher deposit (at least 20 per cent), and you also may need to spend more time shopping around for a lender.

Be careful not to rush into applying for a mortgage. Being knocked back on a loan application will be recorded on your credit report and can adversely affect your ability to borrow in the future. So be sure that when you do apply for a loan, you have sufficient evidence that you can support a mortgage and can demonstrate that you have established a stable financial environment for yourself.

Although bankruptcy is never a pleasant experience, it doesn’t have to put an end to your dream of home ownership. Research your options, be sensible with your financial affairs and, of course, have patience. More information on bankruptcy is available on the Government’s MoneySmart website. Alternatively, for guidance on your specific circumstances, you can seek out free legal services in your state or territory or contact a financial counsellor for free, confidential advice.