How To Qualify For A Mortgage After Going Bankrupt

March 28, 2012 by
Filed under: Bankruptcy, rebuilding credit 

Bankruptcy is often perceived as the “nuclear winter” of debt relief options. Declaring yourself bankrupt basically says that you can no longer handle your debt. Naturally, lenders can be wary of lending to someone who has declared bankruptcy. But, it’s often possible to rebuild your credit so you can qualify for a mortgage again.

You Can Repair Your Credit

No financial mistake will be a permanent stain on your credit report. It merely indicates that you once had a hard time dealing with your debt. How you bounce back from financial adversity is what really matters. Lenders want to see if you are now able to pay your bills on time.

Obtaining a secured line of credit will usually be your first step toward repairing your credit after going through this process. Proving your can handle that balance should allow you to get an unsecured line of credit. Having more than one credit card after your bankruptcy could be a good thing for you. Your credit score is going to go up if you have more available credit.

The key thing is to avoid using that available credit. Learning from your past mistakes is going to be critical to avoiding another personal debt crisis. It is going to be much harder to have your debts discharged through bankruptcy a second time.

If you have an existing car loan that survived the bankruptcy, it’s critical that you continue to pay that loan on time. Similarly, if you already have a home loan, and are looking to purchase another home or refinance in the future, keep your current mortgage payments on time, every month.

Usually, two to three years of on time payments, after completion of your bankruptcy, on three to five good items on your credit will rebuild your credit score to the point you can be approved for a mortgage.

Increase Your Down Payment

Lowering the loan amount improves your odds of getting a loan for your new home. Putting a larger down payment also increases the amount of equity you already have in the home. Ponying up more of the purchase price upfront also lowers your risk of foreclosure. Foreclosure cannot occur if you have a mortgage payment that you can afford each month. You should be aiming for an initial down payment that is 20 percent or more of the purchase price of the home. It still may be possible, though, to obtain an FHA insured loan with a lower down payment.

Make Sure Your Credit Report Is Accurate

All borrowers should take steps to ensure that their credit report is accurate. Creditors are notorious for allowing mistakes to linger on a credit report. Checking your credit report every so often after your bankruptcy is completed is a good idea even if you are not thinking about buying a home. 

Verify that anything that stems from your bankruptcy has been reported as it should be. All debts discharged in the bankruptcy should be reporting with a zero balance and a phrase similar to “included in bankruptcy.” If discharged debts are still reporting, send a dispute, in writing via certified mail, to each credit reporting agency.

In Summary, You Can Qualify for a Mortgage After Bankruptcy

Having to go through a bankruptcy proceeding is never fun. However, it may be your only option if your debt is bad enough. Going through the process can stave off lender actions such as foreclosure. Avoiding this consequence could allow you to sell your current home. The funds from the sale of your old house could help with the purchase of your new home. Keep in mind that the consequences are not going to be permanent. Do your best to show lenders that you have learned from your prior financial issues.

About the Author

Gary Armstrong has made his mark as a Dallas bankruptcy attorney by addressing the needs of consumers and businesses in the areas of bankruptcy, consumer protection, and consumer finance.

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