Bankruptcy and Getting a Mortgage
Updated: Jul 8
I often get the question “Is it possible to obtain a mortgage after filing for bankruptcy?” Many people think that their dreams of home ownership are dashed if they have filed for bankruptcy. Below we will review what bankruptcy is and how you can rebuild your credit score if you have filed for bankruptcy.
What happens when you file bankruptcy
You work with a trustee to generate a list of creditors and assets while filing for bankruptcy by working with a trustee. The trustee will also complete the required paper work at this time. Your bankruptcy begins once you have reviewed and ensure all of your outstanding debts are accounted for. Your trustee will contact your creditors and make them aware you have filed for bankruptcy and make sure they don’t contact you for payments. You will have obligations to fulfill until your bankruptcy is discharged as appointed by your trustee including monthly reporting and credit counselling. It usually takes about 9 months to be discharged from bankruptcy. How do you rebuild your credit?
It is important to start rebuilding your credit as soon as your bankruptcy is discharged. Typically you will need to have had two years pass from the time your bankruptcy is discharged to the time you apply for a mortgage. This is generally what most lenders require. One way to begin rebuilding your credit is to get a prepaid credit card. It is a risk free credit card for the company and you as you put an upfront balance on the credit card that allows you to start rebuilding your credit. Along with this you will want to have 2 trade lines (credit cards, car payments, loan payments, etc.). What type of lender you will be able to use, either a mainstream lender or a B lender, will depend on how long your bankruptcy has been discharged and how much credit rebuilding you have done. What is the difference between and mainstream lender and a B lender?
A mainstream lender will allow a mortgage for individuals with a good credit standing at current market rates with a lower down payment required. B lenders might provide financing if you have not had the opportunity to rebuild your credit to an acceptable level for mainstream lenders. A “B Lender” would traditionally have higher interest rates and a higher down payment requirement due to a lower credit score or history. Mortgages are generally shorter term solutions with B lenders as you rebuild your credit. This is done so you can transfer to a mainstream lender after 1 or 2 years and get a better interest rate. Whether you are just applying for bankruptcy or if you have just been discharged, there is never a better time to start working with a mortgage professional to assist in credit rebuilding and getting you into the home you deserve to own.