5 Steps to Buying a Home After Bankruptcy
Bankruptcy can be a difficult process to get through, it damages the credit score to a significant level where good financial products and services become unavailable for the bankrupt individual in the short term. Not to mention that effect that it has on the psyche of an individual, it can leave one depressed and at a loss of options to continue ahead in life.
Bankruptcy however is not the end of the line. Many people file for bankruptcy and then are able to get back up again. The secret lies firstly in will power. You must believe that you can get through this difficult time. The second thing that you will need is a strategy in order to improve your credit score first, before you can attempt to buy a home.
Strategic planning therefore is going to be the key. You will be buying the home on mortgage and mortgage lenders require credit score of at least 500 in order to approve a mortgage. This is the absolute minimum that you will get if you apply for a FHA loan. Conventional and Jumbo loans have a much higher cut off point in 600s. It is also important to know that the lower your credit score, the higher your interest rate will be for the mortgage. So ideally your credit score should be between 650 and 850 in order to get a deal that won`t be too harsh on your finances.
But the catch we are dealing with is that once an individual goes bankrupt, their credit score drops by at least 200 points. A person going good on 700 points can drop down to 500 as a result of bankruptcy. Someone who is already on 500 may drop down to 300.
This is where strategic planning comes into play. Once you become bankrupt you cannot and should not apply for a mortgage loan if your credit score is not high enough to get a good deal, otherwise you will simply be running into a very high cost mortgage, that may not be favorable for you.
The following steps can help an individual in improving their credit score before applying for a mortgage.
In depth credit review
The first thing that you should do after your bankruptcy is to get an in depth review of your credit report. You are entitled to one free report per year from each of the three credit bureaus. this means that each year you can get a total of three free credit reports.
Stagger your reviews, do not make the mistake of asking for a free review from all three credit bureaus at once. Instead leave a gap of 4 months between each review, in this manner you will be able to see how your credit report is changing over time.
Once you get your report, review it for negative and positive factors. See what is working in your favor and what isn`t. It is also important to check if all of the details of past and current debts are up to date. Make sure that you do not have any debts that you have not taken , sometimes this can happen due to an error or identity theft.
In dept review of your credit report should give you a baseline of your credit worthiness. It is very important to look at the positives, so that you can continue those habits. It is also very important to point out your negative habits and change them so that your report can get better.
Credit Building
Once the credit report has been reviewed, the next most important step is to take measures to build your credit. Credit building measures will to a very large extent depend on how badly your credit score has been affected.
- Credit building loans:
if your credit has been significantly affected then perhaps you can go for a credit building loan. This loan will also work if the credit has not been significantly affected. Credit building loans are offered by small banks and credit unions. In a credit building loan, funds are not disbursed to the borrower right away, instead the borrower makes payments on time and once the debt has been paid off, the funds are released either proportionally or lump sum. As long as you make the payments on time, you should be good and your credit report should improve over time.
- Secured credit cards
Secured credit cards are also a good way of building up credit fast. They require a security deposit to be placed in an account before the card is issued. Secured credit cards are meant to be used very wisely. Remember that you are building up your credit, so try not to make purchases that you cannot afford. Pay the card bills on time each month, as nothing affects the credit score better than timely payments. It is also preferred to keep your card usage between 20% and 30% of the assigned credit limit.
- Installment loans
Get an installment loan and pay back each installment on time. The risk with installment loans is that they carry higher payment terms than credit builder loans, so you will need to make sure you make those payments on time and avoid late payments, as it will be counterproductive.
Plan for Mortgage
As you build your credit up, try to start preparing for mortgage. Consult your mortgage advisor to determine the rates that you can get and what credit score you should look for. Try to get a rough estimate of the mortgage cost and start preparing for it.
Start Saving up
Start making your budgets with mortgage in mind. Set aside savings that will p you repay your mortgage. Focus on creating multiple streams of income in order to supplement your income. Look for passive streams of income as they require relatively less time and energy. Make sure that when you apply mortgage, you are financially ready for the extra burden.
Wait for the right time
It is very important to wait for the right time to apply. Do not apply once you see your credit score improving. It is advised to wait for a period of at least 1.5 to 2 years after bankruptcy before applying for a mortgage. This will give you an ample amount of time to improve the credit score and help you get better terms and rates.
