If you are like millions of Americans after the last financial downturn, you may have had to file for bankruptcy. Whether you could not keep up with your mortgage or had financial problems with your business, having a bankruptcy on your credit report can complicate getting a mortgage loan. But it is not impossible by any stretch of the imagination.
Did you know that thousands of people get approved for a mortgage after a bankruptcy every year? In this article, we will explore the steps you can take to assure you will be approved for an affordable mortgage loan after your bankruptcy discharge.
Below are some tips to qualify for a mortgage after bankruptcy so you can enjoy the American Dream again.
#1 Choose Between Chapter 7 and Chapter 13 Bankruptcy
A Chapter 7 bankruptcy releases you from your obligations to pay for unsecured debt, including credit cards, medical bills, car loans and mortgages. People who file for Chapter 13 are often business owners who will still have to pay back some of their debt but get a new payment schedule that makes the monthly payments more manageable.
Most consumers file Chapter 7, but it is worth talking to a bankruptcy attorney to determine which is best for you. Bear in mind that mortgage lenders view Chapter 13 more favorably because you are paying back some of your debt.
#2 You Don’t Have to Wait 7 Years for Mortgage Eligibility
There are many misconceptions online about how long you must wait to buy a home after bankruptcy. Many believe that you need to wait seven years to buy a home again. This is not true. The seven-year number is merely the number of years the bankruptcy will usually stay on your credit report. Just because you have a bankruptcy listed on your credit report does not mean you cannot get a home loan.
How long you need to wait to apply for a mortgage will depend upon the type of home loan. For an FHA home loan, you will probably need to wait two years to apply, but in some cases, you can apply in a year.
Fannie Mae-backed lenders say that you need to wait two years after bankruptcy to apply. The waiting period begins on the day your bankruptcy case was discharged. Fannie Mae offers reasonable home mortgages after bankruptcies have been finalized.
Remember, having a bankruptcy on your record will not prevent you from buying a home, once you get past the required waiting period for your lender and type of loan. As the years pass, the bankruptcy is weighed less and less in your credit profile, until, after 7 years, the bankruptcy usually drops from your credit report.
#3 Reestablish Credit After Bankruptcy
The biggest problem for people after a bankruptcy and getting a home loan is reestablishing credit. You will need to reapply for credit and show that you are paying your bills on time. You may think that getting credit after a bankruptcy is impossible, but there are credit cards you can get with a low credit limit that can raise your score. Also, you can get a secured credit card where you ‘fill’ the card with a certain amount of money and use it to pay for things. Paying on the card will be reported to credit agencies.
Also, you may be able to secure a higher interest car loan with a bankruptcy on your file. Getting a car loan is a good way to reestablish credit; you are showing lenders that you are making timely payments on long term debt.
The key thing to reestablish credit is to pay all bills on time. The problem that many have after bankruptcy is they continue to make late payments on their bills and credit accounts. This will prevent you from getting a home loan more than the bankruptcy, once the waiting period passes.
Experts recommend opening one or two revolving credit lines with credit cards and pay them on time for 12 months to reestablish credit. It’s very important to steer clear of your bad-credit past by establish credit and showing lenders that you can re-pay a new mortgage with less risk.
#4 Save for a Down Payment
You can get a home loan with as low as a 3% down payment. But when you have damaged credit, it is easier to get a home loan when you have a bigger down payment. If you can, try to put down at least 10% so that you can show the lender you have skin in the game and are behaving in a financially responsible manner. Learn more about how to buy a house after a bankruptcy.
If you follow these tips, you will be able to qualify for a home loan much faster than you might think after a bankruptcy.