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How to Rebuild Credit After Bankruptcy to Qualify for a Mortgage

  • May 3, 2021
  • By Saved by the Cents
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How to Rebuild Credit After Bankruptcy to Qualify for a Mortgage

If you have recently gone through bankruptcy, the idea of buying a home may seem far-fetched. Not so fast – we can assure you that is still possible to bring your credit back up and secure a home mortgage.

By being proactive about your financial situation and having patience, you will begin to rebuild your credit and see that there is light at the end of the tunnel.

What Happens to Your Credit Report/Credit Score When You File Bankruptcy?

Bankruptcy is a type of public record that is listed on your credit reports. Regardless of the type of bankruptcy you file for, lenders will be able to see it on the report and your credit may be negatively impacted. That said, you should look for common credit reporting errors post-bankruptcy such as creditors continuing to report the account past due or not showing a $0 balance.

There are two types of bankruptcy: Chapter 13 and Chapter 7. A Chapter 13 bankruptcy is defined as “a reorganization designed for debtors with regular income who can pay back at least a portion of their debts through a repayment plan.” A Chapter 13 Bankruptcy remains on your credit report and affects your credit scores for seven years. If you file for this type of bankruptcy, you will be required to repay at least some of the money you borrowed. 

A Chapter 7 bankruptcy is defined as “a liquidation designed to wipe out your general unsecured debts such as credit cards and medical bills.” Chapter 7 bankruptcy does not require you to repay any money back, but it will affect your credit report and scores for ten years. 

What are Steps You Can Take to Rebuild Your Credit?

Rebuilding your credit is the most crucial aspect of getting back on track to qualify for a mortgage. Here are the steps you can take to get started on the process of rebuilding your credit:

1. Examine Your Credit Report

A good start is to organize all accounts current to ensure that everything is accurate on your credit report. It is unfortunately not unheard of for creditors to continue reporting negative account information even after your bankruptcy discharges, so be sure to keep an eye out for any errors that may need to be reported to the credit agency. You will want these to get corrected as quickly as possible to avoid digging yourself deeper into debt.

2. Check Your Credit Score 

Checking your credit score on a monthly basis is a great way to track progress. There are many free online resources available to check your credit score regularly, such as EquifaxExperian, and Transunion. As a result of the COVID-19 pandemic, AnnualCreditReport.com is offering free credit reports once a week through April 2022. The government also provides access to a free credit report annually.

3. Apply for New Credit 

It is important to take actions that will boost your credit in the right direction and show lenders that you are a trustworthy borrower. Here are some of the best ways to acquire new credit after bankruptcy. 

Get a credit-builder loan:

Credit-builder loans typically range from $500 – $5,000. With these loans, the money is placed in a savings account and is released by making payments upfront. This ensures that you are paying the lender back before you receive the money, thus helping to boost your credit. 

Get a secured credit card:

A secured credit card requires a cash security deposit, making them easier to acquire than an unsecured credit card. By making timely payments, your creditworthiness will begin to rise. This is a viable option for the short term to restore your credit until you can become eligible for an unsecured credit card. 

Get a retail / gas credit cards:

These forms of credit cards also have much easier requirements to meet than other unsecured cards. Safely rebuild credit by using them to make small purchases such as a tank of gas and paying the balance off quickly. With these types of credit cards, it is important to only apply if you are confident that you will qualify. If you do not get accepted, applying could have reverse effects on your credit.

Consider a co-signer:

If you have a family member or friend with good credit history, consider asking them to co-sign for you. A co-signer can act as a legal financial backer so that you can get approved for credit under your name.

Become an authorized user:

If co-signing is too risky or simply is not feasible, consider becoming an authorized user on a family member or friend’s credit card instead. It is important to make sure that the credit card issuer reports them to the credit bureaus for the payments to show up on your credit report and boost your credit. 

Open a small loan:

Although interest rates might be higher after bankruptcy, the cost might be worth it in the long run of rebuilding credit. A small loan such as an auto loan with fixed payments will demonstrate that you are a responsible borrower. 

4. Make Timely Payments 

Timely payment history is the most important aspect of rebuilding credit. Going forward, making on time payments will be essential to boosting your credit. You may want to consider setting up automatic payments to make certain that you are never late with a payment. If able, paying more than your minimum monthly payment can speed up your progress. 

5. Keep Balances Low 

To show that you are managing your credit well after bankruptcy, you want to keep your credit card balances low. A low balance means you are using a smaller percentage of your total available credit. Our experts advise you keep your balance at 30% of your credit limit or lower. If you can keep it under 10%, it will be even better for rebuilding credit and proving to lenders that you will repay what you borrow. 

What is the Credit Score I Need After Bankruptcy to Get a Mortgage?

Your biggest worry may be that you can’t reach the minimum credit score to qualify for a mortgage after bankruptcy. However, most loan types include a fairly reasonable minimum credit score, and some even cater specifically to borrowers with low credits scores.

The minimum credit score to get a mortgage after bankruptcy is typically 620 but can vary by loan type and by the lender. VA loans require a 620 minimum, while Conventional and USDA loans require a 640 minimum. 

The minimum credit score for FHA loans is the lowest among all mortgage loan types, however, a lower credit score calls for higher interest payments. A credit score of 500 to 579 requires a 10% down payment, whereas a credit score of 580 to 620 requires a down payment of 3.5%. 

See the table below to understand minimum FICO considerations.

Loan TypeMinimum Credit Score
FHA Loan500 – 579 (with 10% down)
FHA Loan580 – 620 (with 3.5% down)
VA Loan620
USDA Loan640
Conventional Loan640

How Soon Can I Qualify for a Mortgage After Bankruptcy?

Mortgage guidelines have relaxed in recent years, significantly decreasing the waiting period to be able to apply or re-apply for a mortgage loan. These waiting periods vary by both mortgage type and the type of bankruptcy you have experienced, as shown below:

VA 

  • 2 years from Chapter 7 discharge
  • 1 year of on-time payments for a Chapter 13

Low Down Payment Government  

  • 2 years from Chapter 7 discharge
  • 1 year of on-time payments for a Chapter 13

USDA 

  • 3 years for both Chapter 7 & 13

Conventional 

  • 4 years for Chapter 7
  • 2 years for Chapter 13

See the table below to summarize the information.

EventConventionalFHAVAUSDA

Chapter 7 Bankruptcy


2 years


2 years


2 years


3 years

Chapter 13 Bankruptcy
 2 years from discharge 
2 years from discharge
2 years from discharge or 1 year of on-time payments
3 years from discharge

Note: The above time periods don’t start until you discharge your bankruptcy. A bankruptcy discharge releases you from liability for certain specified types of debts and prohibits creditors from taking any form of collection action against you on discharged debts (i.e. any debts owed forgiven through bankruptcy). It also protects you against any and all communication from creditors such as telephone calls, letters, and personal contacts. Once you’ve discharged your debt, the clock starts ticking.

Are There Any Exceptions That Can Help Me Get A Mortgage Sooner?

Exceptions can be made if a borrower has experienced an occurrence beyond their control that resulted in a loss of income, loss of employment, or a combination of both. You may fall into this category if your bankruptcy resulted from something you never saw coming such as a job layoff, a medical emergency, or a divorce.

If you are able to demonstrate that the circumstances that led you to file for bankruptcy were unavoidable, it can mean a shorter waiting period on all types of mortgage loans. With extenuating circumstances, the waiting periods are as follows:

FHA, VA, USDA: One year after discharge

Conventional: Two years after discharge

There are many paths to getting a mortgage after bankruptcy, some of which you might not be aware of without the guidance of a mortgage specialist. We hope our expert advice has helped you realize that just because you’re down, doesn’t mean you’re out. By taking it day by day and one payment at a time, you can and will rebuild credit to qualify for a mortgage after bankruptcy.  

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Roger Odoardi is a co-founder, partner and licensed mortgage broker at Blue Water Mortgage Corporation, an independent mortgage broker offering New Hampshire Mortgages as well as mortgages in: Massachusetts, Maine, Connecticut, Florida and North Carolina.

By Saved by the Cents, May 3, 2021
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