Getting a mortgage after bankruptcy
by Shawn Carvin, Senior Mortgage Banker
Going through a bankruptcy can be one of the most stressful experiences of a person’s life. It can strain your relationships and your confidence. Bankruptcy is a black mark on your credit record, but it’s not the end of the world. Let’s look at some common questions about getting a mortgage after bankruptcy.
Recovering from bankruptcy is easier than you might think
A bankruptcy on your credit report will reduce your credit score by 100 points or more. For the first few months after a bankruptcy appears on your report, it’s not uncommon to have a credit score in the mid to low 500 range, or even lower. The most important things at this point are to consistently pay all bills on time and to use any remaining credit accounts responsibly.
Taking the right steps to raise your credit score after bankruptcy
A few months to a year after the BK appears on your credit reports, you can start to obtain new credit. You’ll likely need to get a secured credit card at first, and later, one to two cards targeted to people re-establishing credit. Getting an installment loan for a vehicle is also a possibility, but the rate will be relatively high. You build credit by showing that you can pay your bills consistently on time over a period of years. So whatever you do, don’t overextend yourself and never make a late payment ever again. Even one late payment will set you back significantly, because it re-starts the on-time payments clock.
Only apply for accounts that you really need. A credit inquiry for a new application will stay on your credit report for up to two years. An excessive number of inquiries will lower your score, so apply wisely.
Bankruptcy stays on your credit report for 7 to 10 years. Do you have to wait that long to get a mortgage?
Obtaining a mortgage after bankruptcy doesn’t require nearly a decade of waiting. Even though your credit history is affected for the long term, you can still be approved for a mortgage well before the bankruptcy drops off your credit report. For most mortgages, you’ll have to wait at least four years, along with putting in the work to reestablish your creditworthiness.
Some mortgages — such as FHA and VA loans — can be approved in as little as one to two years after bankruptcy, with a credit score as low as 580. But these loans will have higher interest rates and cost you thousands more over the long run. An important factor in the recovery of your credit profile is patience. There is no substitute for time. The longer you’ve had accounts open and the longer it’s been since the last negative issue, the better your credit, and the more options you’ll have for getting a mortgage after bankruptcy.
How can you see what’s on your credit report?
It’s easy to get a free copy of your credit report. By law, each of the three national credit reporting companies — Experian, TransUnion, and Equifax — has to provide a free copy of your report each year. You can get your free report at https://www.annualcreditreport.com
You can also use a free credit monitoring service like Credit Karma to keep tabs on your credit profile, although information from all three credit reporting bureaus won’t be available to you.
Regularly review your credit information for discrepancies. Ensure that negative items are coming off when they’re supposed to, and dispute any item that is false. You can dispute items through the web site of each credit reporting company.
Remember, life goes on
A bankruptcy is, indeed, stressful, but it’s not the end of the world. You can rebuild your credit history, but make sure you take charge of it. Learn from the past, and don’t hesitate to seek expert advice when you need it. If you handle your credit correctly, you’ll put that chapter 11 or 13 behind you sooner than you think.