Over the past 5 years, more than 6 million Americans have filed for bankruptcy. Prior to the bankruptcy code changes in 2005, another 14 million people had filed. If you were caught in the down draughts of the most recent financial crisis or were a victim of the dot-com bubble, you may count yourself among these 20 million Americans. As you have rebuilt your life and worked to put your financial house in order, you may have wondered if you would ever be able to own a home.
Mortgage lenders will not ignore your bankruptcy, but they may be more willing than you realize to finance your home purchase. New rules require lenders to scrutinize your financial health more closely than ever before and insure you are able to repay the loan. If you have recovered from bankruptcy and would like to buy a home, here are some important tips to help you prepare for your financial checkup.
Acute Or Chronic
A mortgage lender will want to know what led to your bankruptcy, and more importantly, if those events are likely to happen again. If you are self-employed in a cyclical business or one that may be subject to sudden declines due to market conditions or changes in government regulation, you may not be considered a good risk. The chances of you filing bankruptcy again, should something happen, are too great.
If your the circumstances that led to your bankruptcy no longer exist and you can demonstrate the safeguards you have developed to avoid a repeat of those circumstances, then a lender will be more interested in working with you. An employer going out of business, a serious medical condition or the untimely death of a spouse are unique situations that mortgage lenders are more often prepared to overlook.
Even more important than the reasons you filed for bankruptcy are the kind of credit habits you have cultivated since the time of declaration. While some people avoid credit in the wake of a bankruptcy, it’s important for a mortgage lender to see that you have established a solid post bankruptcy credit history.
Get a secured credit card, use it regularly, and pay it off religiously every month. Apply for consumer loans for things like furniture or a car, and establish a repayment history that shows your willingness to pay debts. For regular bills like phone service and electricity, pay them on time or better yet, set up an automatic payment plan for all your bills.
Healing the Scars
Many times there may be marks on your credit history that don’t belong there. Marriage and divorce, moving, finishing school, old debts or simply having a common name, may leave scars on your credit report. Make sure you request your annual free credit report from all 3 major credit reporting agencies. Look for obvious mistakes and follow the specific agency instructions for disputing items on your credit report.
Show a good balance between spending and saving. If you find your lifestyle constantly rises to meet your income, you need to regain some balance. Having enough reserves to cover your living expenses for six months is a good rule of thumb. If you are preparing to purchase a home, then make your goal to accumulate enough savings for a 20% down payment. With enough cash to put down 20% and reserves to cover 2 months worth of living expenses, a mortgage lender will find it easy to put your bankruptcy in the past and give you a good rate on a new mortgage.