If you have recently gone through the bankruptcy process, you may wonder what options are available in terms of buying a home once you get back on a solid financial footing. Fortunately, the goal of obtaining a mortgage is not out of reach for people in your situation, although a waiting period and an improved attitude toward finances must occur first.
The Waiting Period Between Bankruptcy and a New Mortgage
Think of the waiting period between declaring bankruptcy and applying for a new home mortgage as an opportunity to change your bad financial habits so that you can enjoy a prosperous future. Use the following information as a guide to the waiting period itself and the various ways to improve your money situation. At the minimum, you can expect a two to the three-year waiting period between the time that your bankruptcy is discharged and the time that you can consider filling out mortgage applications with reputable lending agencies. Although sub-prime or high-risk mortgage lenders might be willing to work with you soon after you file for bankruptcy, this strategy can easily backfire and is not advisable.
Wait to negotiate with the lenders that want to see that you are capable of financial responsibility. Try to hold out for three years because your interest rates and down payment minimums will most likely be lower than if you only wait for two years. While you are in this waiting period, you should routinely pull your credit report from all of the credit rating agencies. Initially, ensure that all of your debts have, indeed, been discharged and that your bankruptcy status is officially on record.
Then, keep checking your credit report to be certain that no errors appear and if they do, get them corrected as quickly as possible. Keep in mind that collection agencies can sometimes purchase your old debts and reopen a claim. If this type of activity shows up on your credit report at any time, do what you can to repay the debt and keep your record free of negative information.
Although your bankruptcy will remain on your credit report for seven years if you file Chapter 13 and 10 years if you file Chapter 7, you can still bring your credit score into a high range while waiting to apply for a mortgage. Take the initiative to establish good credit by applying for a secured credit card. Once you receive the card, start making small purchases that you can pay off on time without fail. Try not to exceed 30% of your credit limit and space your purchases out so that you don`t become overwhelmed. When you are confident with your new credit habit, you may want to try applying for a high-interest unsecured card such as a store card.
Again, make all of these payments on time without defaulting, or you will not be in a good position to get a mortgage later on.
As you are strengthening your credit score, work diligently to pay off any existing or new installment loans on time. If you already have student loan debt that was not discharged with bankruptcy, be careful not to default on these loans during the waiting period. Taking out another type of installment loan, such as a car loan, is a good idea if you are completely confident that you can pay off your bills in a timely manner. As with credit cards, do not make a purchase that is more than 30% of your loan limit; this gives you room to pay extra toward your balance each month and show mortgage lenders that you are responsible.
If you are renting a property while waiting to apply for a mortgage after bankruptcy, demonstrate a commitment to good financial practices by paying your rent on time every month. It`s a good idea to pay your rent with a check rather than cash so that you have a paper trail to show your future mortgage lender. Keep copies of your canceled rent checks from the most recent one-year period or ask your landlord to provide verification of your timely payments. Acting as a responsible tenant without any issues in regard to paying rent can boost your potential for success in landing a mortgage.
The waiting period between bankruptcy and eligibility for a mortgage is a good time to hone your skills in managing money in all aspects of your life. Try to save money whenever possible so that you can establish a good debt-to-income ratio. Retain stable employment and make arrangements to set up a retirement plan. Make sure that you have enough money in the bank to avoid bouncing checks and do not incur any new debts that you will struggle to pay off.
In preparation for a mortgage, you will need to save enough money for a down payment
on a home plus closing costs. A good rule of thumb is to put away enough for a 15% down payment. If you need some help in saving money for this purpose, you may wish to consider options such as borrowing money from family members, enrolling in a down payment assistance program, or cashing out an investment account. Weigh these options carefully to ensure that your finances will not be negatively affected in the long run.
Preparation for Mortgage Application
Once you have built up a good credit history, shown reliability in paying off loans, and put your finances in order, you can begin the process of applying for a home mortgage after bankruptcy. Keep the following tips in mind when you fill out applications and make contact with lenders.
Firstly, be certain that you check the date of your foreclosure for accuracy so that you can show proof of having waited the appropriate amount of time to seek out a lender. If you have worked to maintain a clean credit history since your bankruptcy, you should be able to obtain full financing on a VA or HFA loan. Do not be discouraged if you are not offered a low-interest rate as this is to be expected.
When deciding on a lender, you will need to consider whether you want to use a traditional lending agency or an online lending agency. A mortgage broker can assist you in selecting potential lenders that best suit your circumstances. Remember to be patient when seeking a lender and keep shopping around until you find someone reputable to work with.
Be prepared to provide verification of your current income so that potential lenders can be assured that you will have the money to pay your mortgage each month. Other important documents to have on hand include bankruptcy discharge papers, tax return records, documentation of liquid assets, and bank account information. While bankruptcy does delay your opportunity to obtain a mortgage, this goal is attainable provided that you take the steps needed to get on the path toward financial stability. Following the bankruptcy advice detailed above can help you to become a strong candidate for a home mortgage in the least amount of time possible.