Filing a Chapter 7 or Chapter 13 bankruptcy can have a damaging effect on your credit score and delay any plans of purchasing a home. Whether you file bankruptcy to reorganize your debt or erase what you owe, your credit score can decrease by as much as 200 points. It takes time to recoup lost points and prove you’re worthy of credit again. And unfortunately, a bankruptcy remains on your credit report for up to seven to 10 years. During this period, it’s harder to qualify for financing.
But while you can’t get a mortgage immediately following a bankruptcy, you may qualify for a loan in the near future.
Be Patient and Wait Two Years
A bankruptcy is devastating to your credit history, but the good news is that the damage lessens with time. Be patient and give your credit score time to recover. You have to wait a certain length of time before applying for a mortgage. The wait times vary depending on the type of mortgage program. For example, there is a two-year wait period for getting an FHA loan after a Chapter 7, and a one-year wait period after a Chapter 13 (as long as you’ve kept up with payments under the reorganization plan). If applying for a conventional loan, you have to wait four years after a Chapter 7 and two years after a Chapter 13. Some lenders may approve your application sooner, but this approval often comes with a higher interest rate.
Rebuild Your Credit History
After a bankruptcy, lenders lose confidence in your ability to pay your debts. You have to regain their trust by rebuilding your credit history, which starts with paying your bills on time every month. This includes auto loans, student loans, credit cards and utility bills. A good payment history makes up 35% of your credit score, so you’ll want to avoid late payments, collection accounts and judgments. If you’re rebuilding credit from scratch, apply for a secured credit cards. You’ll need a security deposit, but it’s easier to qualify for these cards with bad credit. You can also ask your landlord to report on-time rent payments to Experian CreditBureau. This adds positive activity to your credit report and also helps rebuild you credit history.
Plan for a Large Downpayment
Buying a house requires a minimum down payment between 3.5% and 5% for an FHA and conventional mortgage, respectively. But unfortunately, even if your credit improves and you qualify for a mortgage two years after a bankruptcy, some lenders will require at least a 10% down payment. If you’re buying a $150,000 house, you’ll need $15,000 for a down payment. This is in addition to paying your closing costs, which can be as high as 5% of the loan balance.
