You’ve likely heard that a bankruptcy sits on your credit report for up to seven years. While that’s true, it doesn’t affect your ability to get a mortgage that entire time. In many cases, you can get a mortgage in as few as two years after a Chapter 7 discharge.
Just how do you do it? Keep reading to learn the steps you should take.
Build Your Credit Again
First, you need to build your credit up again. A Chapter 7 bankruptcy wipes the slate clean. While that is great for your finances, it’s not great for when you apply for another loan. You need a credit history – a positive credit history.
Right after the Chapter 7 discharge, start building your credit. It sounds odd, why would you take on new debts after getting out of debt, but it’s important. Don’t jump in headfirst and drown in debt again. Instead, take it slow.
Start with a secured credit card. You may only get a credit line of a couple hundred dollars, that’s okay. Take it and use it. Don’t keep a balance, though. Pay the credit card every month. Charge expenses you normally pay anyway. Show lenders that you are financially responsible even after filing bankruptcy.
Once you have a secured credit card, apply for an unsecured credit card or personal loan. Get as much good credit going as you can. You want a decent mix of installment debt and revolving debt with good payment histories. This will show lenders that you can manage your finances again.
Get a Good Rental History
Lenders need to see that you can handle a housing payment even after the BK. If you rent, make sure you make your payments on time. Also, have proof of the payments. If you rent from family or friends, keep canceled checks. If you rent from a rental company, have them complete a Verification of Rent form for you. If it shows that you made on-time payments, it will help lenders make a solid decision on your mortgage.
Fix the Problem
While you build up your credit, think about why you filed for bankruptcy. Did you lose your job, fall ill, or just get carried away with your spending? Lenders are going to ask what happened. They aren’t nosy. They want to know what led to the downfall to see if it’s something that could happen again.
If you want to show lenders that you are responsible, show that you’ve overcome the problem that caused the bankruptcy. If you lost your job, the obvious solution is to have another job. Show lenders that you’ve been at the job for at least 12 – 24 months and that you can succeed at it. If you fell ill and got behind, show lenders that you were able to pick up the pieces and get current again.
You may need to put your reasons and solutions in writing. Have as much evidence as you can to help lenders make a solid decision. They want to know that you’ve fully overcome the issue that caused the bankruptcy.
Apply for a Government-Backed Loan
Your best bet, especially if it’s only been two years since your bankruptcy discharge is to get a government-backed loan. Most borrowers take out an FHA loan. You only need a 3.5% down payment, a 580 credit score and only have to wait two years after your BK discharge. The flexible underwriting guidelines make this loan a great option.
If you are a veteran of the military, you may be able to use your VA home loan benefits. If you didn’t use them before or you were able to keep your home through the BK, you may still have your VA benefit left. If you have enough of a VA benefit to cover the price of the home (up to $484,350), you won’t need a down payment on it. VA loans, like FHA loans, only require you to wait two years after your bankruptcy discharge to get a VA loan.
If you don’t qualify for an FHA loan, shop around with subprime lenders. Don’t let the name scare you. These lenders offer alternative loans that they keep on their own books. This gives them the flexibility of writing their own guidelines. You may find subprime lenders that have lower credit score guidelines or that will overlook your BK. They often make it easier to qualify for a mortgage after a BK.
Even if you qualify for an FHA or VA loan, shop around. Each lender sets its own guidelines and charges its own rates and fees. Because you have a BK in your recent history, lenders will probably charge more money for your loan. Shop around until you find the most affordable option to help you avoid any future financial issues.
Getting a mortgage after a Chapter 7 discharge isn’t as hard as it seems. You just need to put in the legwork and the try to fix as many credit/financial issues as possible before applying. The more positive factors you can show a lender, the more likely it is that you’ll get approved.