There are no guarantees after bankruptcy – no guarantees about what kind of credit you will qualify for. The answer is that it depends on you.
It’s All About Risk Management
Bankruptcy or not, a mortgage lender is assesses the risk of somebody not being able to pay the mortgage. Lenders are in the business to loan money to those they think can pay the funds back.
Too much risk and you won’t qualify for a loan. High risk and your mortgage rate will be very high. Learn to manage your risk profile and you will qualify for a mortgage at a reasonable cost.
Here’s a look at the factors that are unique to bankruptcy.
A first time bankruptcy will show on your credit report for up to seven years after you are discharged from bankruptcy. Many lenders will consider your application for a mortgage even during this period, however what is more important is that you establish that you are now able to handle credit wisely. In other words, you need to show that you are a better credit risk than before.
This takes time and there are steps you need to take to rebuild your credit.
It’s important to review your credit report after you are discharged to ensure that your discharge status is updated and that your creditors have noted the debts as “included in bankruptcy.” It’s also important to re-establish yourself by obtaining new credit and making the payments on time. Avoid having any new items go into collections. New items in collections would likely be a deal breaker.
Reasons for Bankruptcy
Lenders are not entirely without compassion. Some will provide some benefit of the doubt when a bankruptcy is caused by factors completely beyond a person’s control. Having greater income stability is definitely a plus.
Length of Time from Bankruptcy
The first tier of lenders normally will not consider you for a mortgage until you have been discharged from bankruptcy for at least two years. It is possible to consider a “non-conforming” lender, but this would usually require a higher down payment and result in a higher interest rate.
About that down payment, the minimum you would likely be required to have is 10%. A non-conforming lender may require as much as 25% or more. The funds have to be from your own savings, not a loan or gift. The more you have, the more likely you will be approved.
Nature of Property
Remember that lenders are all about risk assessment. The ultimate hammer that a mortgage lender has against you if you default on the mortgage is to take possession of the property and sell it. For this reason, many lenders will consider the nature of the property. The want to assess any potential appreciation, or depreciation, in value of the asset. Is it in a large urban community? Or, is It in a smaller, semi-rural community where it might be more difficult to sell the property? There may also be risk considerations with respect to the style of property: fully detached, semi-detached, townhouse, condo, etc.
It is possible to qualify for a mortgage after bankruptcy, but it really does depend on you and your choices. Bankruptcy is your fresh start – what you do with it is up to you.