- Mortgage After Bankruptcy: Credit Score Impact
- FICO and Other Factors Your Mortgage Lender Considers
- Why do I have to wait two years to apply for a mortgage?
- Improving Your Credit Score
- Bottom Line: Make Sure to Plan for the Future
Life isn’t over after bankruptcy. If you dream of owning a home, you will be able to get a mortgage, but it will usually require a wait of two years, during which you can work to rebuild your credit score and save that dreaded down payment. The median home value in Los Angeles is $632,000 at the time of this writing, and the median price of homes currently listed is $748,000. Of course, many houses cost much more, so it’s no wonder that lenders today are careful.
In this post, we’ll go over what you need to know to get a mortgage after bankruptcy, including how bankruptcy temporarily impacts your credit score, what other factors mortgage lenders look for, what to do during your wait time for applying for a mortgage, and how to improve your credit score. If you have any questions, our experienced Los Angeles bankruptcy and debt negotiation attorneys are standing by to help with a free consultation.
Mortgage After Bankruptcy: Credit Score Impact
First and foremost, if you want to buy a house, you must be concerned about your credit score. There are different types of scores, but usually lenders look at your FICO score. The requirements of lenders vary, and there is no specific credit score number you need to get a mortgage from all lenders. However, if you have a credit score of 680, you will probably be able to get a conventional mortgage, but a score below 600 will make it quite difficult. Most lenders will want to see a score of at least 660 for a conventional loan. However, for better rates, you should be able to provide a credit score of 720 or above.
The Federal Housing Administration (FHA) requires a minimum credit score of 580 to qualify for a 3.5% down payment. For an FHA loan, your credit score can be as low as 540 with a 20% down payment. Of course, FHA loans have federal insurance, so if you are not taking out an FHA loan, expect the lender to be stricter about requirements.
If you have filed for bankruptcy, it can stay on your credit report for up to 10 years from the filing date. That means if you’ve filed for Chapter 13 and completed a five-year repayment plan, you have another five years to go. For Chapter 7, it’s right after you file.
FICO and Other Factors Your Mortgage Lender Considers
Fair, Isaac and Company originally developed the FICO formula, in case you were wondering about its name. FICO takes the following elements into account, ranked from greatest to least importance.
- Payment history: Do you pay on time? Payment history accounts for approximately 35% of your FICO score.
- Amount of credit owed: How many lines of credit do you have? How much do you owe on each? This accounts for approximately 30% of your FICO score.
- Length of credit history and recently opened credit: It’s detrimental to have a large number of recently opened accounts.
- Types of credit: The mix of the types of credits you are using will be considered, such as installment loans, credit cards, etc.
You can read more about these factors here: 5 Factors that Determine Your Credit Score. However, lenders do look beyond your credit score. They will consider your income, look at your assets, and weigh your debt. The type of loan for which you are applying also is a factor.
Lenders like to see the following:
- Substantial down payment on the house
- A good debt-to-income ratio
- No history of bounced checks
- Money in your bank accounts — the more the better
- Stable job history without excessive job-hopping
- Retirement plan contributions
Why do I have to wait two years to apply for a mortgage?
Wait at least two years before applying for a mortgage. The FHA will insure mortgages to individuals who have filed a Chapter 7 liquidation bankruptcy two years after the discharge if “the borrower has re-established good credit (or has chosen not to incur new credit obligations), and has demonstrated an ability to manage financial affairs.”
It may be possible to get a mortgage sooner than two years after your bankruptcy discharge, but it’s not advisable. Certainly, your interest rates are likely to be friendlier if you wait at least two years after discharge.
Remember, you will be making mortgage payments for years to come, and a difference in interest rates can amount to thousands and thousands of dollars.
Improving Your Credit Score
There are a number of things you can do to improve your credit score ahead of applying for a mortgage, with or without a bankruptcy discharge on your credit report, including the following.
Acquire a Secured Credit Card
It may seem counterintuitive, but in order to rebuild your credit, you will need to take out loans and repay them on time. Of course, it will be difficult to get credit following a bankruptcy for a little bit of time, but you will be able to get a secured credit card. A secured credit card gives you credit up to the amount you have in the bank that issues the card.
Take out an Installment Loan
An installment loan is any kind of a loan that requires monthly payments, such as a student loan or a car loan. You must make your payments on time every single month in order to use your installment loan to rebuild your credit. The earlier you can pay, the better. Just be sure to watch out for any errors on accounts, such as being overcharged for your student loans.
Check and Correct Your Credit Report
After your bankruptcy has been discharged, check your credit reports at the three big credit agencies: Equifax, TransUnion, and Experian. It can be painful to do so, but it’s necessary. You are looking for errors: debts you have repaid but still appear and any other types of mistakes. Contact the credit agency where the mistake appears to have it corrected.
Don’t Apply for Too Many Credit Cards or Loans
If you apply for a lot of credit, it will adversely affect your credit score, and lenders will be much less likely to give you a mortgage.
Use Your Rent Payments to Increase Your Credit Score
Rent may be the biggest regular payment you make, yet it rarely is reported to credit agencies. Check with your property manager to find out if your rent payments are being reported. If the credit agencies have the information, they will include it in your credit report.
You cannot supply the information yourself, but if your property manager is not reporting your rent payments, you can apply to credit reporting services who can supply your rent payments to the credit agencies who issue credit scores. To learn more, see this recent blog post: High Rent? Here’s How to Use Those Payments to Improve Your Credit Score.
Bottom Line: Make Sure to Plan for the Future
You can buy a house after your bankruptcy discharge, but it does require planning — and budgeting. (Some of these top finance apps may be able to help.) Make sure you choose a bankruptcy attorney who can not only get your debts discharged in bankruptcy, but can also help you rebuild your life afterward.
You may also be interested in:
- 5 Affordable Places to Buy a House in Southern California
- How to Get the Best Deal on a House in LA
- Saving Money in LA: Should I Keep Renting, or Should I Buy?
- Deed in Lieu of Foreclosure: What it Means for Your Home
- How Much Mortgage Debt Can I Discharge in Bankruptcy?
M. Erik Clark is the Managing Partner of Borowitz & Clark, LLP, a leading consumer bankruptcy law firm with offices located throughout Southern California. Mr. Clark is Board Certified in Consumer Bankruptcy by the American Board of Certification and a member of the State Bar in California, New York, and Connecticut. View his full profile here.