Filing bankruptcy should be a last resort for any individual who needs a way out of debt. It is a very serious alternative to decide upon, because filing bankruptcy essentially is a declaration that you unable to pay your debts. Consequently, bankruptcy severely taints your credit report.
Your credit report and score and used by potential lenders to determine whether or not you are worthy of having credit extended to you. If you are seen as too “risky” of a borrower, then you will not be able to get credit without a very high interest rate attached. As soon as the ink dries on your bankruptcy documents, you should have your sights set on rebuilding your credit.
Using a Mortgage to Rebuild your Credit
In addition to utilizing credit repair tactics, you must prove that you credit-worthy by handling credit properly. This means that, while it may seem counterintuitive for the recently bankrupt, you should start working with credit again carefully.
You will need to dabble in both revolving and installment credit to rebuild your profile. Revolving credit involves open-ended lines of credit from which you continuously may draw, such as a credit card. Installment credit, on the other hand, is a one-time lump sum that is repaid gradually through periodic payments.
A mortgage is a type of installment credit. It probably seems that such a huge loan would be impossible to obtain after bankruptcy, but in actuality it is one of your best choices. It is entirely possible to get a mortgage loan post-bankruptcy.
Perhaps because it is such a large commitment and because the loan will be secured against your house, a mortgage is relatively easy to obtain by the formerly-bankrupt. There are even some lenders who will consider lending to you immediately after your bankruptcy – as in, days afterward.
Obtaining a Mortgage soon after Bankruptcy
Such mortgages are provided by companies that are known as “alternative” lending services. They will charge sky-high interest rates and fees in exchange for acquiring your “risk”. They often also have very specific criteria for determining eligibility for your program. If you are able to wait on your mortgage, then you probably will want to do so.
Most lenders will want you to wait about two years before borrowing a mortgage loan, but some will consider you before this point (after about six months or so). In this case, they will have to determine your eligibility based on criteria other than your credit since you will not have had a change to really prove your creditworthiness at this point. Instead, they will consider your down payment and income.
If you do not have the immediate means to make an acceptable down payment, then there are down payment assistance programs available to you. At the very least, you probably will need about to put down about 3-5% of the loan.
After Two Years
After this two-year timeframe, your options increase significantly. As long as you have maintained good credit since your bankruptcy, you should not have a problem obtaining a mortgage at a decent interest rate. You specifically might want to look into obtaining a mortgage from the Federal Housing Administration (FHA), the interest rates of which usually are only about .5% points higher than regular mortgage rates.
It is entirely possible for most people to secure mortgages after bankruptcy (even right after), but patience pays off. If you are certain that you will be able to afford a home and all of the costs that come with it, then you definitely can find a mortgage to suit your needs.