Getting a Mortgage After Bankruptcy and Foreclosure

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Getting a Mortgage After Bankruptcy and Foreclosure

Both your health and your pocketbook may suffer if you lose your house to foreclosure or are forced to file for bankruptcy. You still have options if you’ve ever had to deal with foreclosure or filed for bankruptcy. Getting a mortgage and purchasing a new house may be feasible if the correct measures are taken.

Key Takeaways

  • Bankruptcy or foreclosure remains on your credit report for at least seven years.
  • By paying bills on time and keeping your credit utilization ratio low, you can begin to rebuild your credit.
  • After two or three years, you may be eligible for a new mortgage.
  • You will pay a greater interest rate during bankruptcy or foreclosure than you would have before your financial issues.
  • After going through a prior foreclosure, it’s crucial to take out a mortgage that you know you can afford.

Click Play to Learn All About Buying a House After Bankruptcy

Step 1: Review Your Credit Reports

Foreclosures and bankruptcies under Chapter 13 may stay on your credit record for at least seven years, while bankruptcies under Chapter 7 can be there for up to ten years. Unfortunately, there is nothing you can do to get those bad markings off sooner. However, it’s crucial to keep an eye on your credit reports during this time.

Examine your credit reports from the three main credit agencies first. Verify the accurate reporting of all the accounts that were included in your bankruptcy petition. Make sure that the foreclosure you experienced is appropriately recorded as well.

After that, check for any mistakes or inaccuracies. Your credit score might be reduced by a mistake of any size. You have the ability to file a dispute with the credit bureau that is reporting the information if you find an inaccuracy. You may file a dispute online with Equifax, Experian, and TransUnion.

The credit agency is obligated to either rectify the mistake or inaccuracy or delete it from your record if they find it. Either one might assist in improving your score, which could increase your potential for obtaining a mortgage in the future.

Tip

AnnualCreditReport.com offers one free copy of your credit reports each year.

Step 2: Rebuild Your Credit

Your credit score may be severely harmed by both bankruptcy and foreclosure, but their effects will lessen over time. You may take efforts to improve your score in addition to addressing any inaccuracies you notice on your credit reports.

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Some of the most effective techniques to raise your credit ratings over time are as follows:

  • paying monthly payments on time, perhaps earlier if feasible
  • requesting a secured credit card and paying your balance in full each month
  • After bankruptcy or foreclosure, keep any credit cards you may be using at a low credit usage ratio.
  • To develop a solid payment record, apply for an unsecured or secured credit building loan.

After bankruptcy or foreclosure, it’s crucial to make on-time payments in order to protect what may already be a poor credit score. Additionally, use caution when applying for new credit cards or loans since each application might lower your score.

Note

Check to determine whether your payments will be recorded to the credit bureaus before applying for any credit card or loan. This might assist to raise your credit score.

Step 3: Establish Consistent Income

Following a bankruptcy or foreclosure, maintaining a consistent income is crucial for a number of reasons.

The first benefit is the chance to start saving money. When you’re ready to attempt purchasing a house once again, you may start a savings account for emergencies and start putting money down for a down payment.

Next, when you do apply for a mortgage, having a consistent income might help you seem less dangerous to lenders. Lenders often prefer to work with homeowners who have established careers and reliable monthly income.

Additionally, bear in mind that if you work for yourself or own a firm, additional restrictions may be in effect. In such case, lenders may like to examine two years’ worth of income history rather than just one. So keeping accurate records of your money is equally crucial. W-2s, 1099s, and copies of pay stubs may all be a part of that.

Note

Depending on the loan type, several sources of income are eligible for mortgages, although they often include commissions, self-employment income, dividends, alimony payments, and child support.

Step 4: Be Patient and Research Loan Options

You must wait to apply for a mortgage if it has been less than two years after your obligations were eliminated via bankruptcy. It is possible that you may have to wait longer—typically at least three years—if your prior property was lost to foreclosure.

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During this period, you may examine the criteria for various home loans and concentrate on improving your credit. Following a bankruptcy or foreclosure, you can be eligible for loans such as:

Credit scores, income, assets, and debt restrictions vary depending on the kind of loan. For someone coming out of bankruptcy or foreclosure, an FHA loan could be the best alternative out of these. A credit score of 580 and a down payment as low as 3.5% are both acceptable requirements for an FHA loan. If you can put 10% down, you may even get an FHA loan to buy a house with a credit score as low as 500.

Important

After filing for bankruptcy or experiencing a foreclosure, you should anticipate having to put down a sizable amount of money and paying a higher interest rate.

Step 5: Prepare to Apply

What happens next once you’ve rebuilt your credit and endured the required waiting period? To start, you should confirm that you have enough money saved for a down payment. The loan might affect how much you require. Once again, you may put as little as 3.5% down on a house when using an FHA loan. There is no required down payment for USDA and VA loans. But in order to get a traditional loan without having to pay private mortgage insurance, you will often need 20% or more down (PMI).

You may prepare for a mortgage by organizing certain paperwork. Among the things a lender could want are:

  • W-2s
  • 1099s
  • Tax returns
  • Pay stubs
  • Bank statements
  • Statements of a retirement or investment account

Keep in mind that you’ll probably pay a higher interest rate on your loan than you would otherwise if your credit score is still poor as a result of bankruptcy or foreclosure. That will ultimately have an impact on how much you can afford to spend on a property. You generally don’t want to strain yourself with a large mortgage payment if you’ve had issues in the past.

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A mortgage calculator is a great tool for creating a budget for these expenses.

You should be aware that the lender can need a co-signer. Consult any family members or friends who could be prepared to co-sign the loan on your behalf. Do this only as a last choice since they will be held accountable if you can’t make the payments, which might ruin your connection with them.

How long does a foreclosure stay on your credit?

Your credit record will reflect a foreclosure for up to seven years. The first two to three years after a foreclosure are often when bad credit consequences are the highest. The negative effects of foreclosure on credit scores may progressively diminish over time.

Can you buy a house after a foreclosure?

After a foreclosure, you may purchase a home, but first you must put your “financial house” in order. You may get ready for a house purchase by taking the time to restore your credit, put money together for a down payment, and, as a last option, find a co-signer.

What happens when you have a bankruptcy and a foreclosure?

You may declare bankruptcy and prevent the bank from foreclosing on your house. Depending on the sort of bankruptcy you apply for and if you have equity in your property, you may be able to retain it if you do. Of course, you risk losing your home if you file for bankruptcy after your home goes into foreclosure.

The Bottom Line

Many people hit financial rock bottom at some point in their lives and end up with bankruptcy or foreclosure on their record. If that has happened to you, it doesn’t mean that you have to give up your dream of owning another home. You may only have to postpone the dream for a bit. Meanwhile, you can use that time to shore up your credit and save for a down payment.

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