Many people think that life after bankruptcy is like living in hell. However, this is just a myth. If you act wisely and take the right decisions, your life after bankruptcy can be quite smooth and back on track. You can also get a mortgage to build your own house but it takes about 2- 3 years for this to happen. Since the present day price of houses is quite huge, hence it is very obvious for the lenders to be much more cautious before lending. Thus, to get a mortgage post-bankruptcy needs proper guidance and planning. This article aims at giving you a brief description on how to get a mortgage after coming out of bankruptcy phase and the impact this phase has on your credit status. For a detailed expert guidance and assistance, you can also visit Recovery Law Group or give a call at 888-297-6203.
What is the impact of bankruptcy on credit score and mortgage lending?
The first thing that you need to consider before going to buy a new house is the status of your credit. The most commonly adopted credit score by money lenders is the FICO score. Different lenders follow different requirements and credit score based criterion. Generally, any person who has a credit score of 650 or above is eligible to get a mortgage and for those having a credit score below 650, it might be a tedious task to get a mortgage after bankruptcy. Moreover, if you are one of those who want a mortgage with a better price, then you must maintain a credit score of 700 and above.
If you do not want to face the tedious requirements of the money lenders, you can opt for FHA (Federal Housing Administration) loans as they offer a down payment option of 3.5% at a credit score of 580 and another down payment option of 20% at a credit score of 540.
It is vital to note that if your bankruptcy is filed under chapter 13 then it will show up on the credit report until next 10 years but if you filed it under chapter 7 then it gets off just after your filing.
Various factors considered by the lender before giving mortgage:
Most of the money lenders follow the FICO formula that considers the below-mentioned factors with decreasing priority order:
- Your payment history depicts your ability to pay on time or not. It accounts for about 35% of the total FICO score.
- The number and amount of credit you owe to every line of credit holds about 30% of the total FICO score.
- The number of your recently started credit accounts.
- The various types of credits that you are presently using which may include credit cards, installment loans, etc.
Apart from the above-mentioned factors that are considered for calculation of the FICO score, there are various other factors also that a money lender takes into consideration before making up his mind to give you a mortgage. Some of the most common factors are enlisted below:
- History of any bounced checks
- The balance of your bank accounts
- The kind of job (a stable job is more preferred)
- Whether you have any retirement plans or not?
- The debt to income ratio must be good
The time period required before applying for a mortgage?
Generally, one has to wait for about 2 years post bankruptcy for applying to get a mortgage. For people who file their bankruptcy under chapter 7 are provided insured mortgages by FHA after 2 years of discharge of their bankruptcy. You can also get a mortgage even before the term of 2 years; however, the interest rates will be larger. Hence it is advisable to wait for at least 2 years duration to get a mortgage at pocket-friendly interest.
How to get better credit scores:
Following are the ways by which you can get improved credit scores. These methods are applicable whether or not the bankruptcy shows up on your credit report.
- Get a credit card that is secured- this is a counter-intuitive way of improving your credit score. You can take loans and credits from the bank and then repay them in the specified time limit. Doing this will improve your FHA score and liability. It will take some efforts to get a secured credit card post-bankruptcy, but you must not give up easily. However, do not apply for too many of them as doing will increase the financial burden on you.
- Try to take up a loan that needs repayments in installments- there are various loans like the car loans and student loans which require the debtor to pay on a monthly basis in the form of installments. Such loans are termed as installment loans. You can take such a loan and then make timely payments to improve your credit score.
- Rebuilding the credit report- three of the major credit agencies whose report you must check are Trans Union, Equifax, and It is a very important step after the bankruptcy is discharged so as to rectify if any paid debts are stilling being shown on your credit report. In case of any discrepancy, consult the respective agency and get your credit report correct and updated.
- Using rent for payments- using the rent for making payments can be a smart way of getting out of your debts. You must get these rent payments included in your credit report to increase your credit score. For this, you can either contact your property manager if he/ she is cooperative or else you can contact the agencies that report credit to supply your rent payment details to the credit score issuing agencies.
Lastly, you must have a logical and realistic plan before applying for a mortgage. This is important to avoid any further problems after the discharge of the bankruptcy. For proper planning, you can consult a good bankruptcy attorney who can sort out things for you.