What's the Outlook on Getting a Mortgage After Bankruptcy?

By Karen Lawson
Mortgage Credit Problems Columnist

So you've filed bankruptcy and your credit scores have tanked. The good news is that qualifying for a mortgage loan can be easier than getting approved for other types of credit.

Depending on the type of bankruptcy you filed, your credit history will show it for seven to ten years. But as it fades into the distance, a bankruptcy filing becomes less important, and your more recent history is weighted more heavily.

If you play your cards right, you may be able to qualify for an FHA or conforming mortgage loan in as little as two years. Here are some things to do between completing bankruptcy and shopping for a mortgage loan.

Bad Credit:Improving Your Credit Scores

One thing about bankruptcy is that your credit scores probably won't ever go lower than after filing bankruptcy. Order free credit reports and also credit scores (not free) from annualcreditreport.com to determine your credit scores The only legitimate ways to improve credit scores are:

• Repaying all debt on time, every month, over time: Even if your credit card accounts were closed in bankruptcy, it's essential to re-establish credit. If you have a mortgage, or car loan, pay your accounts on time every time. Mortgage underwriters will review your credit history, so avoiding late payments is important.
• Reducing debt: If you have active credit lines after filing bankruptcy, be careful how you use them. Financial advisors typically suggest owing no more than one third of your available credit line for each account. Pay more than the minimum amount due, and pay off revolving balances quickly. Using credit carefully is better for your credit scores than not using your accounts at all.
• Paying your bills: Mortgage underwriters like to see recent and responsible use of credit when approving a home loan. If you don't have credit cards, make sure you pay your housing and utility and other bills promptly.
• Avoiding high cost "second chance" credit: After filing bankruptcy, you may be solicited for "second chance" car loans or credit cards. These offers typically carry high finance charges (APRs) including fees that can make repaying such debt difficult. .
• Establishing savings: A savings account indicates financial responsibility. If you don't have the willpower to regularly contribute to savings, ask your employer or bank about direct deposit savings. You can have a specified amount deducted periodically from each paycheck or checking account and deposited to savings.

Finally, don't fall for claims of "instant credit repair" or "erasing bad credit." The only path toward improving bad credit is following these steps. Credit scores improve gradually; there is no "instant fix."

 

 

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

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