Declaring Chapter 7 or Chapter 13 bankruptcy is often devastating and can turn your home buying plans upside down.
Going into bankruptcy shuts down your ability to borrow money or use a credit card, severely lowering your credit score. It will take some time to build back enough credit to apply for a new credit card or to take out a mortgage on a home. However, with proper preparation, patience and financial planning, you might be able to purchase a home sooner than expected.
Discharge and Organize
First things first: The bankruptcy must be discharged. If you are still in the process, or if you are still in credit counseling or any other program that takes over your finances, no mortgage lender will speak to you.
Once your bankruptcy is discharged, organize and scrutinize your credit report. If there are debts that have been paid back but still appear on your report, contact the credit agency and have them corrected. While you’re at it, check for other mistakes on your credit report. You are entitled to one free credit report from each of the big three credit rating agencies each year—Equifax, Experian and TransUnion. If there is an error, dispute it online via the particular credit agency’s website.
Use Secured Credit Cards and Installment Loans
The fastest way to start rebuilding your credit score after a bankruptcy is to prove to creditors and other lenders that you can be trusted to pay back the money you owe them. You can do this two ways: secured credit cards and installment loans.
A secured credit card gives you credit limited to the amount you have on deposit with the issuing bank. So, if you have $20 to $500 to place in an account with the issuing bank, then the bank will limit your credit each month to the amount of that deposit.
An installment loan is simply one where you make installment payments each month. It can be a personal loan, car loan or student loan. If you get an installment loan, then you only need to do one thing: make your monthly payments on time.
More Tips to Remember While Building Credit
- Use only a small portion of your credit. Don’t max out your credit cards and don’t apply for too much credit at one time.
- Move slowly and build up your credit with on-time or even early payments. When possible, pay back more than the monthly minimum.
- Pay all your bills on time and save money.
- Stay at the same job for a good length of time.
- Remove any outstanding tax liens.
Here’s where you will need patience: You should wait at least 24 months after your bankruptcy is discharged to apply for a mortgage. You may be able to get a mortgage sooner but the terms, like interest rates, won’t be as attractive as they would be if you waited two years. Since you might be paying that mortgage interest for up to 30 years, you will save money if you wait long enough after the discharge to get a good interest rate.
Finally Applying For a Mortgage
After the two-year period, make sure you are fully prepared to apply for a loan. Your lender will want you to meet certain criteria before agreeing to lend you money: A good debt-to-income ratio, stability and time on the job. Money in the bank and no bounced checks help tremendously, of course. Any retirement plans or 401(k) assets makes your credit look good as well.
And remember, a big down payment carries a lot of weight. Keep that in mind during the two-year waiting period and save as much as you can.
Visit www.MarkCarterLaw.com for more information.