Getting A Home Loan After Declaring Bankruptcy

The recent economic down-turn had resulted in many people filing for personal bankruptcy. Many of these individuals fear that this meant the end of their dream of owning a house. They think that with a bankruptcy on their credit records, no lender would be willing to finance their home purchase. The fact is, it is not impossible to get a mortgage after bankruptcy. There are some things to consider that help in improving one’s chances of getting a mortgage.

A home buyer can qualify for an FHA mortgage in as little as two years after a bankruptcy, and in four years for a conventional loan. After the waiting period has passed, financing for a home purchase can be sought. During this waiting period, things can be done to improve one’s credit rating so that lenders will look more favorably upon the borrower.

Many factors affect the rate that the borrower can get on his mortgage if he or she has had to declare bankruptcy. For someone starting fresh from bankruptcy, the interest rates available will not be very favorable. Still, a lower interest rate can be obtained if a larger down payment is put down. Also, if bills have been paid on time since the bankruptcy discharge, that will be looked upon favorably by the lender. Improvement in the credit score is another aspect that the lender considers.

After the bankruptcy discharge, the credit report should be reviewed to make sure that every debt has been closed and discharged. Items to watch out for are debt items that remain open because some creditors may continue to report them. That can erode a person’s credit score even more.

A person can start improving his credit score by paying all of his credit card bills on time. One strategy is to open a store credit card that is unsecured and which carries a high interest rate and pay for all charges in full during the grace period. The high interest rate will not matter because the borrower will not carry the balance over to the next billing cycle. The whole point in this is to build up positive credit activity so that lenders will see that the borrower can handle debt more responsibly now. One should only use less than 30 percent of the available credit.

When the borrower applies for the mortgage, he should be ready to provide all documentation relating to his bankruptcy. The process of applying for the loan is the same as the loan application process of borrowers who did not file for bankruptcy. The borrower just has to convince the lender that he is a good risk.

Getting a mortgage after bankruptcy is not impossible. The borrower will need to work on improving his credit score during the waiting period after the discharge. Proof of steady employment and income, a low debt-to-income ratio, and a low loan-to-value of the house to be purchased will all work for getting that mortgage. With some careful planning, the dream of owning a house can be kept alive.

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