Credit Rebuilding After Bankruptcy to Qualify for a Mortgage

Prequalify for an FHA home loan now.

When Can I Start Rebuilding My Credit After Bankruptcy?

Your credit score reflects how you handle money over time, so credit rebuilding after bankruptcy should start the minute the bankruptcy has been discharged.

It may come as a surprise to learn that your credit score will fall more than 100 points after bankruptcy. This sudden drop is only temporary, though, and you can correct it by taking the right steps:

  1. Monitor and manage your credit history.
  2. Address errors on your credit report.
  3. Keep paying non-bankruptcy debts on time.
  4. Start building your new credit history.

How to Rebuild Credit After Bankruptcy

Once your bankruptcy has been discharged, your first step is to monitor and start managing your credit history. It’s important to get a copy of your credit report periodically throughout the year. That helps you spot identity theft and address errors quickly.

A smart way to stay on top of activity that affects your credit score is to get one credit report from each credit bureau every four months. You can get a free copy of your credit report from each of the three credit bureaus at AnnualCreditReport.com.

Your credit report will show:

  • your bankruptcy file and discharge date
  • zero balances for all credit tradelines that were included and discharged through bankruptcy.

What if an outstanding balance is still on your credit report?

There are times where creditors show an outstanding balance on your credit report after your bankruptcy. This practice is illegal and is easy to fix:

  • If any of your discharged debts are still being reported on your credit report, notify each of the credit bureaus of the problem immediately. Send a copy of your bankruptcy discharge to each credit bureau so they stop reporting any information on the bankruptcy list of creditors.

How to handle debts reaffirmed in bankruptcy

U.S. bankruptcy courts allow petitioners to reaffirm debts, excluding them from their bankruptcy. This means that certain secured debts such as a home or automobile can be excluded from bankruptcy. For example, a homeowner may want to keep their home and not include it in the bankruptcy. This is called reaffirming the home mortgage.

Not all debts can be discharged in bankruptcy, however. Federal student loans and other federal debts are examples. They cannot be discharged in bankruptcy. Credit tradelines that are active, on the other hand, will impact consumer credit scores.

Above all, keep current on debts that are reaffirmed.

It’s important to keep paying non-bankruptcy debts on time. Late payments after bankruptcy can kill a deal when applying for a mortgage. Lenders consider late payments after bankruptcy discharge a second offense. More than 90% of lenders will not approve borrowers with late payments after bankruptcy.

Video: Secured Credit Cards to Re-Establish Credit to Qualify for Mortgage

Should I Hire Credit Repair Companies In Credit Rebuilding After Bankruptcy

Fastest and Easiest Way to Rebuild Credit After Bankruptcy – Secured Credit Cards

The fastest and easiest way to rebuild credit after bankruptcy is to use secured credit cards. A secured credit card works just like a regular credit card except that it requires a deposit from you. For example, if you want a $500 limit credit card, the secured credit card company will ask you to put up a $500 deposit. If you want a $1,000 credit limit, you need to make a $1,000 deposit, and so on. You use the card for transactions like you would with a traditional credit card.

Raising your credit score

The key to raising your credit score to the highest levels after bankruptcy is to get three secured credit cards with at least a $500 credit limit – and then making timely payments on them. Any credit limit under $500 is helpful, but it does not have the maximum potency like a $500 credit limit secured credit card.

Once you have a great track record of paying your secured credit cards on time, the secured credit card may increase your credit limit without asking you for additional deposits. Each secured credit card can boost your credit score by 20 to 40 points. Your credit scores will improve as your secured credit card ages.

Making timely payments is critical

Secured credit cards work the same way as traditional, unsecured cards in the sense that they report to the credit bureaus. So if you do not pay the minimum amount due on your secured credit card, it will be reported as late to the credit bureaus. This will be devastating for your credit and credit scores, so be sure to pay all of your monthly payments on time religiously after your bankruptcy.

Remember, mortgage lenders and other creditors consider late payers after bankruptcy second offenders. Most will not grant a mortgage if you have a history of late payments after bankruptcy.

Related: Mortgage with Late Payments After Bankruptcy and Foreclosure

When Can I Get Traditional Credit After Bankruptcy?

Bankruptcy will drop credit scores by 100 or more points. It will be next to impossible to get unsecured credit right after bankruptcy.

However, if you get three secured credit cards and make timely payments for at least six to 12 months, you may be eligible for traditional unsecured credit. For best results, make sure to keep the credit card balances low for maximum high credit scores.

Increasing your credit limit

After six months to a year of timely payments, a secured credit card company may offer to increase the credit limit on your secured credit cards without asking for additional deposits. Normally, retail and gas credit cards are the best unsecured credit cards to get after bankruptcy. Consumers with a recent bankruptcy and little to no re-established credit can also get secured loans such as auto loans. However, interest rates may be higher for these loans.

Many creditors do not have a problem granting new credit for consumers with recent bankruptcies. This is because they realize consumers won’t be able to file another bankruptcy for seven years after the discharge date of the last bankruptcy.

How to qualify for a mortgage after bankruptcy

 

Qualifying for a Mortgage After Bankruptcy

There are various options in qualifying for a mortgage after bankruptcy. Government and conventional loans require a mandatory waiting period after bankruptcy. However, borrowers can qualify for non-QM mortgages after bankruptcy with no mandatory waiting period requirements.

Here are the mandatory waiting periods and other requirements to qualify for a mortgage after bankruptcy:

FHA loans

  • FHA loans require a two-year waiting period after Chapter 7 bankruptcy.
  • Borrowers in Chapter 13 Bankruptcy repayment plan can qualify for an FHA loan after one year into the repayment plan with Trustee approval.
  • Chapter 13 Bankruptcy does not have to be discharged.
  • There is no waiting period after Chapter 13 bankruptcy discharged date.

VA loans

  • VA loans require a two-year waiting period after Chapter 7 bankruptcy.
  • Borrowers in Chapter 13 Bankruptcy repayment plan can qualify for a VA loan after one year into the repayment plan with Trustee approval.
  • Chapter 13 Bankruptcy does not have to be discharged.
  • There is no waiting period after Chapter 13 Bankruptcy discharged date.

Fannie Mae And Freddie Mac Conventional Mortgage Guidelines

  • Conventional loans require a four-year waiting period after Chapter 7 bankruptcy.
  • There is a four-year waiting period after Chapter 13 Bankruptcy dismissal date to qualify for conventional loans.
  • There is a two-year waiting period after Chapter 13 Bankruptcy dismissal date to qualify for conventional loans.

Non-QM loans

  • There is no waiting period after bankruptcy to qualify for a mortgage with non-QM loans.

See today’s FHA mortgage rates.

The team at Gustan Cho Associates has helped countless borrowers re-establish their credit after bankruptcy.

Leave a comment