How To Apply For A Mortgage After Bankruptcy
Now, let’s take a look at the specific steps you’ll follow when you apply for your loan.
Step 1: Repair Your Credit
A bankruptcy on your credit report lowers your credit score. If your score is 580 points or lower, you’ll need to take some time to repair your credit so you can meet your mortgage lender’s minimum credit score requirements.
Here are some basic steps you can take to begin rebuilding your credit:
Re-Establish Your Credit
One way to get started re-establishing your credit after Chapter 7 or 13 bankruptcy is to get a secured credit card. When you open a secured credit card, you put a deposit down with your credit card company.
This deposit becomes your line of credit. From there, you make payments on your account and pay off your debt each month. You can get a secured credit card with a low credit score, even after a bankruptcy.
Pay Down Your Debt
Focus any extra cash you have toward paying down debt after your bankruptcy closes. This shows creditors that you’re serious about making a change in your financial situation and raising your credit score over time. Lower levels of debt can also help you qualify for a mortgage.
Pay All Your Bills On Time
The most important thing to do to raise your credit score is to make your credit card and loan payments on schedule each month. Consider signing up for auto-pay if you have trouble managing your payment due dates. Most credit card and loan companies have an auto-pay feature that automatically deducts your minimum payment on the day it’s due.
Step 2: Write A Bankruptcy Explanation Letter
Every time a lender issues a mortgage, they assume a risk. So when you apply for a loan, your lender will take a careful look at your finances to be sure you’ll make your mortgage payments on time every month.
Of course, a bankruptcy on your financial record is a major red flag. You can increase your chances of getting a mortgage after bankruptcy by writing a letter of explanation. A letter of explanation tells your lender more details about your bankruptcy and why you needed to declare bankruptcy.
Include details on the circ*mstances that led to your filing and how your financial life has changed since then. Also, you’ll want to explain the steps you’ve taken to prevent a future bankruptcy as well – like paying off debt and building an emergency fund.
A letter of explanation isn’t always a requirement to get a mortgage after bankruptcy, but it can help your lender see the bigger picture instead of just a set of numbers. Include your explanation letter with your mortgage application when you request a preapproval.
Step 3: Get Preapproved
Once you’ve gone through your waiting period and your finances are in order, it’s time to apply for a mortgage preapproval. A preapproval is a letter from a lender that tells you about how much money you can get in a mortgage loan. Getting preapproved is important for a couple reasons:
- First, a preapproval letter lets you know which homes are in your budget and allows you to narrow your property search.
- Second, a preapproval tells real estate agents and sellers that you’re more likely to be able to secure the funding you need to buy the home you want to make an offer on. This can be an especially important consideration after a bankruptcy.
Provide Financial Documentation
Your lender will ask you for some financial documentation when you apply for a preapproval. You can get preapproved faster if you already have your documents in order before you apply. Some documents that your lender will likely ask for include your most recent:
- W-2s
- Bank statements
- Pay stubs
Keep in mind that preapproval and prequalification aren’t the same. Prequalifications usually don’t require asset verification. This means that they often hold less weight than a preapproval. Make sure you get preapproved – not prequalified.
Step 4: Respond To Lender Inquiries
Once you submit your mortgage application, the rest is in your lender’s hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If meet the lender’s requirements based on these factors, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.
Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lender’s inquiries quickly to improve your chances of approval.
