Buying a Home after Bankruptcy
Build the right strategy for mortgage approval.
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.
That being said, you may have a need to move sooner. If the bankruptcy filing put an automatic stay on the foreclosure of your home, you may need to sell the property quickly and downsize. In this case, instead of immediately pursuing a new mortgage, the best option may be to find a rental property for a few years so you can really get ready to buy.
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.
With that in mind, you need to review your credit report to make sure everything has been updated correctly following the completion of your filing. If you find items that you think are outdated or need to be removed, then you should consider going through the credit repair process.
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.
The first step to rebuilding credit is usually to get a secured credit card. This allows you to get credit with a deposit, so your credit score isn’t really a factor to qualify. Then you make charges strategically and manage the debt closely. Every positive payment you make helps you build credit. You should also make an effort to maintain the balance at no more than 20% of the total credit line you have available.
If you have a $500 credit limit, what’s the maximum balance you should have to maintain the ideal 20% credit utilization ratio?
Credit utilization is the second biggest factor in determining your credit score. Maintaining 20% of your total available credit line maximizes your score.
In addition, make sure to keep up with payments on any other debts that you have. This includes student loan debt that doesn’t get discharged during bankruptcy, as well as the payment for any small personal loans you may wish to take out to help you rebuild your credit. Then you can move on to the steps that follow while you work to build your credit
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.
Find a budgeting platform that makes it as easy as possible to build a budget. Once you have your accounts entered and expenses categorized – which should take less than an hour even if you get really detailed – you can see how much free cash flow you have available to save. Remember that you need as much money as possible for a down payment, so the more you can save each month for the next 12-24 months, the better.
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.
Of course, bear in mind that you may be able to qualify for an FHA-loan for as little as 3% down. But your goal should be to hit the 20% mark in order to make it easier to qualify.
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.
After about 12 months of hard work, you can start the process of buying a home. But that doesn’t mean you get an agent as start making offers. You need to take a lot of time to define what you need in a home, where you want to live, and how much home your can afford. And make sure the amenities and home features you think you need are really things you can’t do without.
Use a mortgage calculator to figure out the size of mortgage you can get without struggling to make the monthly payments. This will help you set the right target price range.
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.
Fact: In most cases your credit score needs to be around 650 at minimum to qualify for mortgage approval.
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.