The negative credit impact of bankruptcy stays with you for years after the date of final discharge – up to ten years, to be specific. But that doesn’t mean that you have to put your life on hold for the next decade. In fact, with the right strategy you can even qualify for one of the toughest types of financing to get approved for… a mortgage. So you can get a new home that meets your needs and works for your budget, too.
The information below can help you craft the right strategy to get your credit and outlook ready for mortgage approval. If you have questions or need to connect with the credit services described, we can help. Call us or complete the form to the right to tell us what kind of assistance you need.
Step 1: Set a date
The first step to get ready for a mortgage after bankruptcy is to determine exactly how soon you want to buy. Ideally, you need about one to two years to build credit and prepare your finances for loan approval. Given new lending standards required following the real estate market collapse in 2009, you may find it downright impossible to qualify if you don’t give yourself that time and do the work described below.
Step 2: Review & repair your credit
Following severe financial distress that leads to bankruptcy, your credit profile may contain a large number of negative items – both correct and incorrect. Completing a bankruptcy should discharge the remaining balances on your debts, balances should be zeroed out and collection accounts should be closed.
Step 3: Take steps to build credit
You can offset negative information in your credit report that can drag down your credit score by taking positive actions for your credit. This means that following bankruptcy, you can take steps to rebuild your credit long before the bankruptcy penalty expires and the item gets removed from your profile.
Step 4: Set a budget & start saving
Financial stability will be key to getting from bankruptcy completion to mortgage approval, so you need to build a formalized budget if you want to be successful. And luckily, budgeting isn’t as much of a hassle as you might think.
Step 5: Maximize your down payment
Speaking of down payment, the more money you have for a down payment, the easier it usually is to qualify for the mortgage you want. Ideally, you want at least 20% of the purchase price of the home. This will allow you to qualify for a traditional mortgage, instead of depending on riskier options like ARMs.
Step 6: The right home, the right price
Allow Steps 1-5 to work. You should be building credit by making strategic purchases and managing your debt closely. You should also be moving all free cash flow into savings to maximize your down payment. The more aggressive you are at doing these two things, the faster you can usually get to where you need to be.
Step 7: Check your credit score
The last step you should take before you start actively looking and making offers. Check your credit score. You can purchase one of your credit scores through a credit bureau or you can enroll in a credit monitoring service to get your scores from one or three bureaus.
Remember, you usually won’t need this service forever (unless you want to keep it for your own peace of mind) so typically only need this for a few months while you make sure your score is as high as possible before you go to apply for a loan. Using this strategy, you can make sure your credit score is maximized, then go to a lender to get the mortgage pre-approval you need to make the search for your new home easier.