For those who have declared bankruptcy, it may feel as though
you're on financial probation for up to 10 years, since that's how
long a bankruptcy can stay on your credit report. However, mortgage
borrowers could be eligible to apply for a home loan in as little
as one year following a bankruptcy.
"If you filed Chapter 7 bankruptcy, which means you discharged
all your debt, you are eligible to apply for a mortgage in
two years for an FHA
or VA loan and in four years for a conventional loan," says Julie
Flatland, vice president of credit in the mortgage lending division
of Carrington Mortgage Services in Santa Ana, Calif.
"If you filed for
Chapter 13 bankruptcy
, you can be eligible in one year for an FHA or VA loan and in two
years for conventional financing," she says. "While those
post-bankruptcy rules are the industry standard, sometimes a lender
will make an exception and approve an FHA or VA loan earlier if
there were extenuating circumstances such as unemployment by the
Lenders for both conventional and government-insured mortgage
loans will scrutinize your credit report to make sure you are
paying bills on time and haven't taken on too much new debt.
"Consumers seeking a mortgage loan after filing for a Chapter 7
or 13 bankruptcy should ensure all bills are current and payments
are made on time, as this will help to reestablish strong new
credit," said Susan Fitzpatrick, director of communications at GMAC
Mortgage in Fort Washington, Pa., in an email. "Additionally,
borrowers should keep all supporting documents related to their
bankruptcy and have documentation on hand to support any
extenuating circumstances of their bankruptcy."
Bankruptcy and your credit
A bankruptcy will lower your
initially, but how much depends on your credit score and history
prior to the bankruptcy. The farther you pull away from bankruptcy,
the less of an impact it has on your credit score, says Gail
Cunningham, vice president of membership and public relations for
the National Foundation of Credit Counseling in Washington,
FHA and VA loans
can be approved with credit scores as low as 620 or 640, depending
on the lender. Since conventional loan interest rates depend on
your credit score, borrowers with a score of 740 or higher
generally qualify for the lowest mortgage rates.
4 post-bankruptcy strategies
Cunningham recommends the following four tips to rebuild your
credit so you're ready to apply when the waiting period is
No. 1: Get a credit card
. Your credit will improve if you can use credit wisely. Opening up
a credit card, using it and immediately paying off the balance can
boost your score.
"You may need to be an authorized user on someone else's credit
card at first, but you'll get the glow of the credit card owner's
positive repayment history on your credit card," Cunningham says.
"You can also get a secured credit card, but not all of them report
your payment history to the credit bureaus. Check to make sure you
choose one that does."
When you eventually qualify for a credit card on your own,
Cunningham warns not to take on too much credit because you will
once again appear overextended.
No. 2: Save, save, save
. "Start saving at least 10 percent of your take-home pay from each
paycheck," says Cunningham. "You'll need cash for a down payment
and lenders want to see a pattern of saving."
No. 3: Open a checking and savings account
. Cunningham says conventional lenders will want to see statements
from these accounts when you apply for a mortgage. Be sure to avoid
overdraft charges on your accounts since it indicates financial
"FHA and VA loans allow non-traditional credit, so people who
prefer not to open a bank account can bring pay stubs to prove
their income and bring cash for the down payment and escrow
account," says Flatland.
No. 4: Pay your rent and utility bills on time
. "A lender will need to see at least 12 months of consistent
payments for your rent and utilities," says Flatland. "Make sure
you keep documentation of all those payments and even payments for
things like insurance."
While rebuilding your credit can take time after a bankruptcy,
it is possible to quickly move forward and qualify for a mortgage
within just a few years.