How to Get a Mortgage Loan after a Discharged Bankruptcy

Having debts discharged in bankruptcy gives borrowers a fresh start financially. They are no longer responsible to pay the sums owed to previous lenders, and those lenders can no longer seek action against them to collect. Unfortunately, there are a lot of downsides to bankruptcy to go along with these protections. The biggest downside, perhaps, is the way it can negatively affect your credit score for years to come. Getting a new mortgage loan after a bankruptcy can be highly challenging if not impossible. Move slowly to give yourself the best options.

Follow all Court Orders

First, you will risk losing your discharge protection if you do not carry out court orders completely. This includes remaining honest about all assets and debts while you are still in the process of bankruptcy. Only after the process has been completed and all debts have been settled, which can take years, are you truly prepared to begin rebuilding your financial stability.

Start with Smaller Loans

It is not appropriate to jump back into the mortgage market immediately following a bankruptcy. You should wait at least 5 years, and 10 is preferable. In most states, a bankruptcy disappears from a credit report, though not a background check, after ten years. In those years, you should begin by taking smaller loans. These can include credit card debt, personal loans and auto loans. It will be easiest to get loans secured against collateral, and you will likely face high interest rates. Paying these loans off can rebuild your credit.

Save for a Down Payment

Once your credit has begun to recover, you need to think about what it will take to seek a mortgage. The first necessity is a large down payment. Saving money in any way possible to provide a large down payment is essential following a bankruptcy. It will give new lenders confidence in your planning ability, and it will also reduce the total size of the loan you are seeking.

Budget for a New Loan

This is the most important step: budget. Know exactly how much you can afford based on your current income. You should have at least three months of all debt payments saved in an emergency fund in case of emergency. You should also have an income high enough to cover all of your fixed monthly payments twice; this means your total debt payments each month should only amount to half of your monthly income. 

Seek Bankruptcy Lenders

With your credit score rebuilt, a large down payment and a budget in mind, you will still need to seek lenders who are willing to work with borrowers who have declared bankruptcy. Some lenders will automatically disqualify you. Others will be more willing to consider your loan. You can determine who to work with by asking for quotes from a handful of lenders. Then, once you have located a few lenders willing to accept your application, you will need to provide all information that may build your credibility as a borrower. You will still find your rates are higher and your limits are lower, but owning a home can be worth this expense.