How to Finance After Bankruptcy
Bankruptcy is a last resort nightmare that no one plans to have. Chapter 13 represents a lack of ability to handle finances, so the court has restructured your debts and are administering payments to your creditors. Chapter 7 represents complete financial devastation. If you are past your discharge date of your bankruptcy, and you are interested in home financing, you have some work to do. Unless you have found a home where the owner is willing to finance you, you have three jobs: clean up your credit report, reestablish new credit and save money. The goal is to be able to show a lender that you have financial stability. Since most lender guidelines require a two year waiting period, you have time.
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Things You'll Need
- Current credit report
- Proof of income
- Bankruptcy papers with discharge date
- Last 2 years w2's
- Pay stubs
- Savings Account
- Written letter of explanation for the bankruptcy
Instructions
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Financing a home after bankruptcy
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Shortly after your bankruptcy is discharged, get a copy of all three credit reports: Equifax, Experian, and Trans Union. This can be accomplished at no cost once per year by going to www.annualcreditreport.com. This will enable you to look at how the bankruptcy was reported. Usually not all bankrupted accounts will state "included in bankruptcy," making it look like charged off and delinquent accounts are outside and in addition to the bankruptcy. These have to be cleaned up. Check for other incorrect accounts that may need to be disputed, and dispute them with the bureaus. You can do this by using the phone number listed on the reports. Do this with all three bureaus. Send your bankruptcy papers to each of the bureaus so all bankrupted accounts will be reported correctly, then request that they send you a corrected copy of your reports. In the meantime, the job of reestablishing credit lies before you. It will take time and money.
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Go and visit your banker. Tell him that you badly need to reestablish credit and ask for any account suggestions he may have. He may suggest a secured credit card which requires funds. This is a credit card that is secured by a savings account. Make sure it will be reported to all of the bureaus, and find out how long the account will have to stay secured before the bank will remove the security requirement. If he grants this credit card to you, use it, and most importantly, make all payments early. As you are able, add more funds to this savings account. This is your down payment savings.
Since credit scores work best with a mix of accounts, you will need to establish at least two other types of credit. If you need a car, watch for dealers who help borrowers who have credit issues. -
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Follow up with your credit bureaus. When you receive your credit reports, look them over to be sure all bankrupted accounts are shown as "included in bankruptcy," and that the discharge date is shown on all of the bureaus. Check for any other accounts you have disputed to see if they are gone, if not, call the bureaus, and dispute again. Ask for a copy of the corrected reports to be sent to you. Also check to see that your newly established accounts are being reported. After a few months, these new accounts will effect new scores for you.
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Continue to make certain that all accounts are paid on time or early. By now, several months have gone by, and the secured credit card will have passed it's period of security, and the bank will have released the savings account. Hopefully, the savings account has grown and you have also set up a couple of other accounts. Continue to monitor your credit reports. You may want to use one of the "paid" credit report websites where you can now get credit reports with scores. (www.FreeCreditReport.com) You want to see scores that are at least 620.
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Make an appoint at the end of the 23rd month after discharge of the bankruptcy with a mortgage lender or broker. Make an application for a mortgage for prequalification purposes. In today's mortgage market, the Federal Housing Administration (FHA) will require the least amount of down payment money, with competitive interest rates, but most lenders now require a 620 mid score from all three bureaus. As of this year, FHA requires 3.5% of the sale price for down payment, and you should have this in your savings. A relative is allowed to contribute down payment on your behalf, but you will still need your savings money for moving expenses. Programs such as Nehemiah (which allowed the seller to contribute down payment funds to a foundation, and then the foundation contributed funds to a buyer) were outlawed in September of 2008. Everything takes money.
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Tips & Warnings
In rebuilding credit, it is possible for a parent or spouse to add you as a signer on their credit card accounts, which will add their history to your report. This is helpful, but be selective of who is adding you. It has to make sense. If this person is not in your household, the underwriter may spot and question this. If you don't have enough accounts on your own merit, it can work against you. If you are in a chapter 13 bankruptcy, it is possible to get FHA financing while you are still in it. Strict rules about payment history of the chapter 13 applies, and you must have been in the chapter 13 for at least one year. You must have approval from your trustee. Any civil judgments must be paid off. Any federal debts such as taxes or student loans that are delinquent will disqualify you.
Down payment assistance is available as grants through your county. Check to see if and when it is available, and if you qualify. Be aware that some county programs are loans, and must be repaid at some point.
