Life doesn't end with bankruptcy - it simply allows you the opportunity to restore your credit and enjoy life without the constant financial strain. In fact, only months after your debts have been discharged, you'll likely be deluged with an onslaught of credit card and other credit offers. And, if you've always dreamed of owning your own home, you'll likely be able to realize that dream sooner after bankruptcy than you might have thought.
Don't expect to purchase your dream home right after bankruptcy. Chances are you'll have to wait until you get that dream home, but that doesn't mean you won't be able to obtain a mortgage for a modest, comfortable home. In many cases, consumers are able to get a mortgage - with a good interest rate - within a year of their bankruptcy.
If you're desperate for a home, you'll likely be able to get a mortgage right after your debts are discharged. However, you should be aware that, because you recently filed for bankruptcy and haven't had a chance to rebuild your credit, you'll be stuck with high interest rates and penalties such as higher points and huge lending fees (sometimes as much as three times the normal rate.) In addition, you may be dealt large prepayment penalties if you try to pay the mortgage off sooner than allowed. If you do decide this is the route you want to go, ensure you carefully read all of the terms and conditions of your loan and try to have a substantial down payment.
However, if you're patient, you can spend the year or two following your bankruptcy carefully rebuilding your credit. Restoring your credit is often a rather simple, though sometimes time-consuming, process. You can restore your credit in several ways.
First, ensure that your credit report is correct. It is your responsibility to ensure all the information on your credit report is accurate. To do this, you'll first need to obtain a copy of your credit report from one of the major credit bureaus: Experian, TransUnion and Equifax. Thoroughly review your credit report checking to ensure all debts discharged in bankruptcy are listed as "included in BK". You'll also want to be on the lookout for closed accounts listed as open and inaccurate personal information. Report all mistakes to each of the credit reporting agencies.
Second, be sure to pay all your bills on time. Late payments leave a black mark on your credit, so avoid them. Many utility, phone, car insurance, and cable companies allow for automatic deductions from your bank account each month. You may want to take advantage of such an option, if you tend to mail your bills late or use the online payment systems that so many companies now offer.
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Start a checking account as soon as possible, if you don't already have one and always have enough funds in it to cover your checks. Bounced checks will do nothing to enhance your credit report and can actually harm it. By making regular deposits and ensuring your checks always clear, you start back towards the road of good credit with the banks. Should you apply for a loan with them later, it will also help to have a record they can see at a glance of all your bills being paid on time.
Another tip many people use to start on the credit rebound is to take out an installment loan. Some experts assert this is the best way to prove your credit worthiness. Take out a small installment loan and pay your monthly payments on time.
One reader emailed us to say they took out a 500 dollar loan and put it into a savings account and just paid the bill each month from that savings account to rebuild their credit. Then they repeated the process with a 1000 dollar loan. You get the idea. But, make sure you only go this route if you can be sure to repay the loan and not spend the money needlessly and put yourself back into debt.
Get a credit card and make small purchases and pay the balance each month. There are many companies who offer credit cards (usually secured) to people fresh out of bankruptcy.
By paying your bills on time and showing you can responsibly handle a checking account, credit card or installment loan you're making yourself more attractive to mortgage lenders. In addition to restoring your credit, if possible, begin saving for a down payment. The larger your down payment, the more forgiving lenders can be when approving your mortgage.
When you're ready to apply for a mortgage start by shopping around for the best rates. You might want to do this yourself or work with a qualified realtor. If you shop around yourself, make sure you do your homework. Check with the Better Business Bureau (www.bbb.org) to ensure the lender is credible. Most importantly, always make sure you carefully read everything you sign - you don't want to find yourself stuck with an unreasonably high interest rate or unappealing terms. If the rates or terms are too high, spend another nine months building your credit and try again.
The bottom line is that the key to getting a mortgage after bankruptcy is to be patient, restore your credit the best you can, try to save money for a down payment and shop around for the best rates and terms. Taking your time and ensuring you're thorough could mean the difference between a great mortgage rate and a home-buying disaster.
Related Articles:
+ Getting credit after bankruptcy: important information
+ General information about discharging debts during bankruptcy
+ A list of books aimed at helping people thinking about claiming bankruptcy
+ Getting a credit card after claiming bankruptcy
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