Qualifying for a home mortgage with a bankruptcy on your credit history requires time and money. Yet by understanding the requirements to get a mortgage after a bankruptcy and by carefully rebuilding your credit standing, you can apply for a loan and buy a home.
Your Credit Score
The three main U.S. credit bureaus–Equifax, Experian and TransUnion–maintain your credit history. Using that history, plus its own proprietary equation, the Fair Isaac Corp. calculates your FICO credit score somewhere between 850 and 300 points. Anything above 700 points is good to excellent, with 720 or above earning you lower interest rates. Below 620 points is considered poor.
Impact of a Bankruptcy
A bankruptcy makes a major impact on your credit score and makes it much more difficult to qualify for a home mortgage. First, you can expect a drop of 100 or more points. That immediately takes you from excellent to poor. Then a record of the bankruptcy stays on your credit history for 10 years. Aforeclosure stays on for seven years. Other negative information such as a late payment stays on for three years.
While obtaining a home mortgage with a bankruptcy on your record is difficult, you don’t have to wait 10 years to begin making a difference.
Importance of Time
After you have filed for bankruptcy protection or liquidation, you will wait four years before a traditional mortgage lender will qualify you for a home loan with market interest rates. And that will happen then only if you have taken steps to improve your credit and are in a good enough financial position to handle the loan.
Two years after a bankruptcy filing, you can apply for a Federal Housing Administration-backed loan. FHA loans have slightly higher interest rates than market-rate loans. However, you might have to come up with less money down.
Hard money lenders will consider offering a home mortgage six months after your bankruptcy, but interest rates are very high and the down payment can be in the 30 percent range.
Before You Apply
No matter what avenue you pursue to get a home mortgage with a bankruptcy filing in your past, you should begin immediately after the filing to repair your credit score. Remember that most negative information falls off your report after three years, so your score could be improving right away.
Do not make multiple credit applications, even if you can qualify for loans or credit cards. Multiple applications push your score down.
Do try to get a secured credit card, but make certain the card issuer reports to the credit bureaus. And be absolutely certain to pay your bill on time.
An installment loan from a retailer can help you establish a good track record. Showing that you have been able to save on your current income will not only help you accrue a down payment, but you will also demonstrate to the lender your ability to manage your finances.
Consider alternatives to traditional home mortgages with a bankruptcy on your record. Seller financing can be an option at any time. This is often a far more flexible arrangement. Plus, if you include this provision in your seller-financed loan agreement, you can convert to a traditional loan as you are able to qualify for it.