Mortgages After Bankruptcy
Rebuilding Your Credit
If you've had the unfortunate experience of going through a bankruptcy, here's some good news: there is "life" for your credit score, post bankruptcy!
One of the best things you can do, first and foremost, is rebuild and repair your credit score. After a bankruptcy, your credit score will be quite low. As this 3-digit number is what most lenders use as a critical part of assessing your qualifications as a borrower, it's important to get it moving in the right direction (higher) as soon as possible.
One of the ways that you can get your credit repaired is to get credit! Amazingly enough, almost anyone can get credit relatively soon after a bankruptcy. But you need to know how. A mortgage is not generally the right place to start; you'll be able to get one a bit later, after you've done some footwork.
Even if you have had a bankruptcy, there are mortgage lenders who will give you a "secured" credit card. This is a great way to start. You may be able to get one with as little as $200 in an account to guarantee payment of the card. (This is what makes the card "secured".) Your spending limit will equal the amount of money that you have put up as guarantee. Interest rates are likely to be high on such cards. Use the card for the occasional purchase. Those purchases should amount to about 30 % of your limit and no more. It's wise to pay off the balance on time. (You don't need to carry a balance to build your credit score.) This simple and no-nonsense approach will start your credit score heading up.
Don't be seduced into any secured card. Pick one with no application fee and a reasonable annual fee. Make sure the card issuer reports regularly to the credit bureaus; call and ask! After all, you are doing this to build your credit score. Also, your secured card should convert to an unsecured card after 12-18 months of on-time payments. After all, you've provided a track record of good payment.
Speaking of credit bureaus, ensure that your credit history is accurate! While the bankruptcy itself may remain on your record for up to 10 years, that doesn't mean that all the problems that led to the bankruptcy should stay on your report. If your report shows accounts that are open and overdue (when they have been "closed" by virtue of your bankruptcy), make sure those entries are removed. You'll have to contact the credit bureaus to do this; when you do, insist that old accounts be properly reported as "included in bankruptcy". At the same time, make sure that any other errors are cleared up, and that your current contact information is correct.
Another simple strategy? Open a savings account, and save 5% of your pay. Savings will also help build your credit score, and will also provide you with a cushion of money in case of emergency.
The other thing that will build your credit score is an "instalment loan". As a result, a car loan can help you build more credit-worthiness. Just be prepared to pay astonishing rates of interest at first. You might start out with interest as high as 20 % or more. Given that, only buy the most affordable vehicle, and consider trading it in early. By the time you've established a good payment record on your car loan for a couple of years, your interest rate will drop substantially.
If you don't want to pay punishing rates on a , you can go directly to a mortgage, once you have done some credit repair with a secured card and a good payment history on your other bills, such as your utility bills. (Most utility companies do report to the credit bureaus.) If your next move is a mortgage, there are lenders who will work with you. They are sometimes referred to as "B-C-D" lenders. But again, be prepared to pay high fees and high interest rates.
You'll do better if you have as large a down payment as possible, but don't despair. Different B-C-D lenders will have different programs, and while you may not qualify for one, you could be perfect for another.
If you are ready for a mortgage, make sure your housing costs are affordable. This is your best bet for avoiding bankruptcy again in the future. You might even want to buy a little less house than you could, and put away a bit of money each month for those unexpected emergencies that can push a solid financial footing over the edge.