Bankruptcy is a chance to start fresh financially, even if the very word strikes fear (and self-loathing) into the heart of those whose circumstances have forced it. However, bankruptcy does not mean the end of your credit life or the end of certain financial hopes—such as owning a home. Bankruptcy home loans are not impossible to arrange.
According to several analysts bankruptcy mortgages are provided by specialty lenders who offer loan programs very soon after a bankruptcy is discharged. This is not to say that it will just happen; you will have to make certain conditions happen involving your credit ratings and your financial picture, mindful that many if not most lenders will not work with those with bankruptcy on their credit inside two years.
The key is the distance between your credit life now and your bankruptcy’s discharge. If you thinking about applying for a home mortgage a day after your discharge, you would have to have your credit score restored to 560 or above and, even there, you could hope only for 90 percent financing at best—meaning, you would have to be able to put down ten percent of the price on your prospective home. If you did not think about trying for a bankruptcy home loan for eighteen months or longer after your discharge, you would need little more than a credit score improved to 520 . . . and the same ten percent down.
All of which means that the further away you have gone from your discharge and the better your credit score reads, the more loans will be available and the less you may have to put down on the home.
To get there, however, you have serious work to do. Most financial advisors recommend that the moment you receive your discharge papers you should get a new copy of your credit report—if possible, from all major credit reporting agencies. The reports should include the status of each individual item, whether the debt in question was included in the bankruptcy, and whether the balances due have been updated to 0. There may be times when particular items do not appear on one or all of your credit reports in status updates. If this occurs, contact the agency in question and ask for the necessary update, including a copy of your discharge and creditor schedule(s) from the court.
When your credit reports are corrected, many advisors recommend establishing more than one new line of credit wherever you can, even if it is something as simple as a credit card with a low credit limit ($500, for example). You could also try getting a gas card (likewise with a low credit limit), or even a small-scale auto loan, perhaps through a dealer that does its own financing rather than using third-party lenders. These auto loans normally entail used cars. If you need a newly reliable vehicle and you can get second-chance financing (beware: this kind of financing usually calls for a different kind of payment schedule than conventional auto financing), pay off in a timely manner, even to where the total loan is retired a month ahead of schedule. You bump your credit rating significantly and get that much closer to thinking about a new home mortgage.
Be sure your auto loan provider and new credit card companies report to all the major credit agencies. With new credit cards, if you get them, it is safest not just to apply for low limits to being but also to use no more than forty percent of them at any time. If you obtain a card with a $500 credit limit, for example, you should restrict yourself to allowing only $200 on the card. This will help you manage your new credit prudently and make it easier for you to raise your credit rating: it should not be difficult for you to make even your minimum payments on time each month, though you should avoid carrying outstanding balances as best you can.
The goal is to show that bankruptcy did not impede your ability to manage your credit prudently and prove your credit worthiness now that your financial hardships are in the past. The more credit worthiness you can show in the wake of bankruptcy, the easier you will find obtaining a home mortgage in that wake.