Form a Plan to Get a Mortgage After Bankruptcy

Bankruptcy is supposed to offer a fresh start, a new beginning unhampered by past debts. However, many are deterred from filing for bankruptcy because of the mistaken belief that wiping out their debts means never accessing credit again. While bankruptcy does have a negative impact on your credit score in the short term, it is possible to qualify for a mortgage after filing for bankruptcy. Below, we offer five suggestions for getting a mortgage after your bankruptcy discharge.

Use Credit Responsibly

by eliminating your unsecured debts, the bankruptcy discharge improves your debt to income ratio. When mortgage lenders underwrite a loan, they want to make sure you have the ability to pay them back. Consumers whose total debts represent a large percentage of their annual income are viewed as credit risks because their limited resources are already stretched too thin. Lenders are skeptical that debtors with high debt to income ratios have the ability to make payments on new debt because their income simply won’t allow it.

By contrast, the discharged debtor has an advantage because bankruptcy has eliminated all of their debt. Based purely on income, they have the capacity to take on new debts such as a car or mortgage loan, however their credit history remains an obstacle. Therefore, the first step towards qualifying for a mortgage after bankruptcy is the responsible use of credit. You need to establish a track record of paying bills on time. To get started, take out a credit card, use it for small purchases and pay down the entire balance every month. This will demonstrate restraint to potential lenders who will see that you’re not using all of the credit you have available. Starting to build a reliable credit history shows your bankruptcy was just a hiccup and that you’re a good credit risk.

Consider an FHA loan

As a means to encourage homeownership, the Federal Housing Administration (FHA) insures  loans made by private lenders to individuals with less than perfect credit against the risk of default. If the borrower can’t afford to make payments on an FHA loan, the federal government guarantees the debt and agrees to pay in place of the borrower. Bankruptcy does not disqualify a borrower from being considered for an FHA loan, in fact the FHA will consider approving a borrower who is still paying on a chapter 13 plan.  In addition, as long as two years have passed since filing a Chapter 7 bankruptcy, and good credit habits have been restored, a past chapter 7 filing will not preclude the borrower from receiving an FHA mortgage. There is a common misconception that the FHA will only approve very small mortgage loans. While the guidelines vary by region, the FHA mortgage limit for a family in Nassau County, New York is a generous $729,750. To look up the FHA mortgage limit in your area, visit the HUD website. Another positive feature of FHA loans is the small down payment requirement. The FHA approves loans with down payments as low as 3.5% of the loan balance.

Click here for a list of FHA approved lenders.

Work With a Co-Signor

If bankruptcy continues to hamper your ability to qualify for a mortgage, it may be time to ask a close friend or family member to co-sign.  A co-signer pledges to make mortgage the payments if you are unable to. The co-signer is effectively ensuring against default by you, the primary borrower. Requesting a friend or family member to co-sign a loan is asking for a big favor. The co-signer will have liability in the event you cannot afford your mortgage and so it is vitally important to ensure that you are back on track financially before attempting to enter into a co-signing arrangement. After all, you wouldn’t want to pass on mortgage troubles to your Mom. Having said that, if you are certain that your financial life is back in order and have a stable source of income, a credit worthy co-signer may be just what it takes to get you to qualify for a mortgage.

Save Money for a Down Payment

This qualifies as “good old-fashioned” advice: the more money you’re able to save, the less money you need to borrow. In the mortgage world, a sizable down payment can be an effective way to ease a bank’s concerns about lending to a borrower with less than stellar credit. Down payments insure lenders against declines in property value as well as delinquency. If borrowers make large down payments, they have more of an incentive to maintain mortgage payments so as not to lose their equity in a foreclosure sale. Furthermore, lenders have an easier time recouping what they’ve loaned if the underlying collateral is worth significantly more than the mortgage balance. If you’re trying to qualify for a mortgage after bankruptcy, saving money is an integral part of the process.

Don’t Bite Off More Than You Can Chew

My Grandma used to say “a penny saved is a penny earned” and she was right. Factoring in monthly savings, figure out how much your family can afford to pay in mortgage payments and don’t stray from your budget. Part of qualifying for a mortgage after bankruptcy will be living within your means and not buying more house than you can afford.  Even if you try to do so, most lenders won’t give you that much rope. As a general rule, mortgage lenders believe that the maximum home price a borrower can afford is roughly three times their annual income. For those facing higher interest rates after emerging from bankruptcy, purchasing a home worth more than two times your annual income is venturing into risky territory.

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