GlobalGrind’s financial coach and author of Yes, You’re Approved: The Real Deal About Getting a Mortgage and Buying a Home, Lynn Richardson, reveals secrets about getting approved for a mortgage in today’s economy.
Previously, I shared mortgage approval secrets you may employ if you are being told your debt ratio is too high or if you are being told you don’t make enough money. Many believe that buying a home after a bankruptcy is impossible. This is NOT TRUE! In fact, There are countless instances wherein those who file bankruptcy and rebuild their credit responsibly obtain mortgages with good interest rates quicker than those who allow bad/poor credit to linger for years. The key is to be armed with correct knowledge, so here are a few secrets you should know about getting approved for a mortgage after a bankruptcy:
1. If at least one year has passed since you filed a Chapter 13 Bankruptcy, you have made all of your Chapter 13 payments on time, and you have accumulated no additional derogatory debt since your filing date, you are eligible to purchase a home using the Federal Housing Administration (FHA) program as long as you obtain permission from your Chapter 13 trustee. If you filed a Chapter 7 bankruptcy, you must wait until 2 years after the discharge date (or one year if there were extenuating circumstance BEYOND YOUR CONTROL) before you are eligible to get approved for an FHA loan.
2. Write an honest and detailed letter of explanation to your lender to accompany your application. The letter of explanation should explain why the bankruptcy occurred (loss of job, divorce, medical expenses, etc.), (2) what you learned during the process, and (3) what you plan to do in the future to prevent the circumstance from occurring again.
3. Pay all of your bills on time for 24 months before your mortgage application. Underwriters will not look favorably at your loan if you pay bills late after a bankruptcy. Beware of medical collections. If a bill comes in the mail, reconcile with your insurance provider, pay it if you can, or make arrangements with the service provider IMMEDIATELY before it goes to collection. One small dental collection for one little tooth could be the roadblock that keeps you from achieving your dream.
4. Live far below your means so it will be easier to restore your credit. You do not want to be overextended going into the homebuying process and remember, mortgage lenders will approve you for a mortgage WITHOUT considering certain expenses like daycare, gas, insurance and other items.
5. DO NOT INCUR ANY NSF fees in your bank account. This will negatively impact your ability to purchase a home after a bankruptcy.
6. Do not accept too many new credit offers. Get one or two credit cards, keep the balances down to less than half of the credit limit, and pay at least twice the minimum payment on time, before the due date, each month. It is important to pay before the due date. When you pay after the due date, you may be subject to a higher interest rate, or a decrease in your credit limit, which can damage your credit rating and future opportunities to obtain credit.
7. Avoid getting a car note if at all possible. This is one of the first offers you will receive after filing for bankruptcy. Instead, save and attempt to buy a car with cash, or if you must get a car note, obtain a pre-driven vehicle with low miles in order to keep the price and financing costs down.
8. Immediately contact all three credit bureaus to ensure that accounts included in bankruptcy are removed from your credit report so your credit score will be as high as possible.