What if you want to buy a home, but you have a bankruptcy on your credit report? You may be worried that you won’t be able to convince a mortgage lender to provide you with a home loan. There’s good news and bad news. First, the bad: It will take time to repair your credit enough to qualify for a mortgage loan. But the good news? Depending on the type of bankruptcy you have filed and the steps you take next, becoming a homeowner certainly isn’t out of reach.
Impact to Your Credit Score
If you filed for bankruptcy, know that you are far from alone. According to the U.S. Courts, during the 12 months ending March 31 of this year, the United States saw more than 1.3 million people file for personal bankruptcy protection.
Individuals can declare one of two types of bankruptcy: Chapter 13 and Chapter 7. Under Chapter 13 bankruptcy, individuals work with a judge to repay all of their debts in a specific time frame. People who declare Chapter 7 bankruptcy have all of their debts wiped out, though they might also lose possessions, such as their cars or homes.
Both types of bankruptcy will damage your credit score, causing it to drop by up to 200 or 300 points. This is key. Mortgage lenders today rely heavily on your three-digit credit score to determine who gets loans and at what interest rates.
Lenders are pickier than ever these days when it comes to those scores, as mentioned in our earlier blog post, “What’s a Good Credit Score These Days?” A credit score of 620 to 650 used to be considered “good credit,” with 680 or above the ideal for those seeking mortgages. Today, you’ll need a 760 credit score to qualify for the best loans at the lowest rates. A bankruptcy on your record will definitely keep you out of the “lowest interest rate” credit score category; for a time, it will even keep you out of the “qualifying for a loan at all” category.
How Long Will Bankruptcy Affect Your Credit?
The two types of personal bankruptcy come with differing penalties. Chapter 7 bankruptcy filings will stay on your credit report for 10 years. A Chapter 13 bankruptcy filing will remain on your credit report for seven years.
Don’t expect to qualify for any conventional mortgage loan within the first two years of a Chapter 7 bankruptcy filing..
There can be exceptions for other loan types and for Chapter 13 bankruptcy. For instance, a lender might be able to approve you for a loan backed by the Federal Housing Administration (FHA) after one year if you’ve filed for Chapter 13 bankruptcy protection. All lenders are different, though; you’ll have to call around to find out which ones might be willing to work with you after a bankruptcy filing.
Rebuilding Your Credit
Take heart: Bankruptcy won’t keep you from owning a home forever. It’s important to remember that you need to start a new credit history — a more positive one — immediately after filing for bankruptcy protection. That’s the real key to erasing the negative impact of a bankruptcy filing.
Taking steps to boost your credit requires that you pay your bills on time every month. It also means not running up credit card debt on any secured or unsecured credit cards you are able to get after declaring bankruptcy.
If poor financial decisions led you to bankruptcy in the first place, starting over in this way may be helpful on several different levels. In fact some consumers’ credit scores will improve (eventually) post-bankruptcy, as their high balances will have been wiped out, and they’ll have a clean slate with which to work.
It will take time, but if you practice good — and more importantly, better— financial habits as your bankruptcy filing fades into the past, you’ll be able to rebuild your credit score to a solid level.
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