Buying a Home After Bankruptcy
Simply put, the objective of the bankruptcy process created by the U.S. Federal courts is to provide the filer with a fresh financial start. Though the experience can be somewhat challenging, it certainly isn't the end of your credit life. It does require however, that you take certain steps to reduce the effects a bankruptcy will have on your credit. This informative article will explain how it is within your power to buy a home after bankruptcy. It will also clear up some myths related to mortgage loans and bankruptcy.
Update Your Credit After Bankruptcy
This process takes a dedicated commitment of time and follow-up but is well worth the effort ¨C the time you spend on this important phase of cleanup converts directly to upward credit scores. As soon as you receive your bankruptcy discharge papers from the court, your first step is to update your credit status by contacting all three credit agencies and requesting a copy of your credit report. For these contacts, refer to http://transunion.com , http://www.equifax.com , and http://www.experian.com .
Familiarize yourself with the format and detailed information contained with your credit reports. By now, each creditor that was included in the bankruptcy and listed in your reports should reflect an updated status of ¡°Included/Discharged through bankruptcy¡± or ¡°account included in bankruptcy¡±. In addition, the ¡°balance due¡± should be updated to ¡°zero¡±. And lastly, in the public records section of your credit report, you need to verify that the statement of ¡°discharged on date¡± is annotated in the ¡°amount due¡± column.
If your reports do not show the correct status and/or the balances are not ¡°zero¡±, you must immediately send a letter to the respective agency, pointing out to them what the problem is and requesting them to correct it accordingly. Make sure to include a copy of your ¡°Schedule of Creditors¡± from the bankruptcy court and a copy of your discharge, this will indicate the debts that were included in the bankruptcy, enabling the agencies to update your credit report. In addition, each credit report should be purged of any and all erroneous or outdated information, bankruptcy-related or not.
Your goal is twofold: (1) The appropriate BK status is reflected for all affected creditors and, (2) All negative or erroneous data is updated or removed completely. With these first steps, you are on your way to a brighter, lighter, future. One your credit is corrected, you are one step closer to buying a home after bankruptcy.
Obtain New Credit for Higher Scores
Since the credit agencies calculate credit scores based on credit and credit history, you MUST now obtain new credit to build up your scores. To this end, it is beneficial to re-establish 2 or 3 lines of credit (auto loan, credit card, gas card) are good examples. A good mix is two credit cards and one installment loan, such as a small personal loan from a bank or a jewelry store. Make sure each new creditor reports to ALL three credit agencies. To boost your scores each month, make sure you do not use over 40% of the credit limit, never be late, and pay off the card each month. For example, if your credit limit is $300, never allow more than $120 on the card at any time. Bottom line, if you obtain new lines of credit, manage the credit correctly, and make your payments on time, your score should move up each month. A good credit score plays a critical part in buying a home after bankruptcy.
Bankruptcy Loan Programs
A bankruptcy mortgage involves four different variables that control loan approval: income/debt, equity, credit score, and the date of bankruptcy discharge. Most lenders run from individuals who have a bankruptcy on their credit inside of 2 years. But many people, even loan officers, do not know that there are specialized lenders who can provide loan programs starting 1 day after you are discharged from your bankruptcy.
Example: For 90% financing, the minimum requirements start at 1 day out of bankruptcy and a score of 560. So if your score is 520, you can still purchase the home but you would need to put 15% down. Now suppose your discharge date was 18 months ago ¨C there are loan programs available that permit the same 90% financing but the credit score only needs to be 520. The further away you are from discharge and the higher your score, the more loan programs there are available and the easier to qualify. Throughout this process, it pays to work with a specialized bankruptcy lender that understands your unique situation and knows how to match you up with the best loan program, terms, and rates available on the market.
In summary, once you have obtained your bankruptcy discharge, followed the steps of updating your credit and raising your scores by obtaining and managing new credit, you have a great opportunity to once again obtain solid mortgage financing. Now, you are ready.
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