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Getting a mortgage after bankruptcy

On Behalf of | Jan 23, 2023 | Consumer bankruptcy |

Going through bankruptcy in Tennessee negatively affects your credit score and can wreak havoc on your finances. It can also take a toll on you emotionally, and if you are looking to purchase a new home you might fear that no banks will lend to you.

Many people have rebuilt their credit and subsequently qualified for a mortgage, and you can do so too. The following tips can get you on the path to improving your finances and buying your dream home.

Take advantage of the waiting period

Great news! You do not have to wait seven to 10 years for the bankruptcy to clear off your credit report before securing a mortgage. However, you will still need to wait a few years.

Depending on the type of lender, whether you filed for Chapter 7 or Chapter 13 bankruptcy, and whether you had extenuating circumstances you could qualify for a mortgage after waiting for one year or up to four years.

Waiting may not sound appealing, but a few years will give you time to save more money for a larger down payment. A larger down payment equals less risk for a lender, which increases your chances of getting your loan approved.

Stay on top of your bills and credit balances

Work to rebuild your credit by paying all your bills on time and keeping the balances on your credit cards low. You can still qualify for a home loan if you have balances on your credit cards, but lenders are more likely to give you a loan if you carry balances of 30% or less of your credit cards’ total capacity.

During the waiting period, avoid applying for any new credit because too many hard inquiries on your credit report can discourage lenders from giving you a loan. Your score takes a dip after a credit inquiry for at least a year, and the inquiry stays on your credit for two years.

If you are actively shopping for a home loan, your lender may expect to see a few inquiries within a short time frame and be ok, but multiple inquiries spread out over a year or two could prevent you from getting a loan.

Choose a lender that specializes in bankruptcy loans

Increase your chances of approval by working with a lender specializing in providing loans to borrowers with bankruptcy on their record. That is easier than it sounds, and your Realtor might have some referrals.

Get pre-approved for a home loan so you know what types of mortgages you qualify for and can budget accordingly. Ask about applying for a Federal Housing Administration (FHA) loan. These loans are backed by the government and may have more lenient terms that make it easier for you to qualify post-bankruptcy.

Bankruptcy does not preclude you from qualifying for a mortgage, and the above tips can help you purchase your next dream home.