Mortgage For Bankrupts

How To Get A Mortgage After Bankruptcy: An Exhaustive Guide

Bankruptcy is a financial crossroads that often leaves individuals feeling hopeless about their future borrowing capabilities. However, the truth is that you can still secure a mortgage after bankruptcy. This comprehensive guide will explain how to get a mortgage after bankruptcy, detailing every significant aspect you need to know.

1. The Possibility of Mortgage After Bankruptcy

Contrary to popular belief, filing for bankruptcy or a consumer proposal does not entirely shut you out from the mortgage market. With a calculated approach and disciplined financial management, securing a mortgage with as low as a 5% down payment is feasible within a reasonable timeframe. However, it is crucial to discuss your specific situation with a local mortgage broker to understand the intricacies that could impact your loan approval.

2. The 5% Down Payment Route

2.1 Qualifying for 5% Down Payment

To qualify for a mortgage with just a 5% down payment, you must meet the following criteria:

 

Be two years past your discharge date.

Comply with the 2-2-2 Rule for established credit, which implies having two credit lines each with a limit of $2,000 or more and a length of two years.

2.2 Importance of Timely Payments

Post-bankruptcy, it is paramount to avoid any missed payments, as this would be perceived by the bank as a failure to learn from past financial mistakes. In case of missed payments, you must wait until the bankruptcy is removed from your credit record. The duration for this is six years for the first bankruptcy and 14 years for the second.

You can contact Equifax and Transunion to know your credit score and history.

3. The Need for a Higher Down Payment

In certain situations, you may need to make a higher down payment—20% or more of the purchase price. This usually happens when the criteria for a 5% down payment are not met. In such cases, you may also need to consider alternative lenders.

4. Special Circumstances to Consider

While filing for a mortgage after bankruptcy, some special circumstances could influence your approval process. These include:

4.1 Double Bankruptcy

If you have declared bankruptcy twice, you will either need to make a 20% down payment or wait for 14 years after the discharge date for it to be removed from your credit record.

4.2 House Included In Bankruptcy

Including a house in bankruptcy doesn’t entirely rule out the possibility of availing a mortgage with a 5% down payment. However, lenders may scrutinize your application more intensively and might require you to fulfill additional conditions like a longer waiting period or more established credit lines.

5. Understanding Good Credit for Mortgage Approval

When applying for a mortgage, your credit score and history play a significant role. Most lenders use the FICO credit score from Equifax. Here are the different credit score categories:

5.1 680 and above

A credit score in this range allows access to almost all lenders in the market. It also enables you to qualify for more money as the Gross Debt Service (GDS) and Total Debt Service (TDS) ratios can be extended to 39% and 44% respectively.

 

GDS is the ratio of your housing costs to your income while TDS includes your housing costs and other debts relative to your income.

 

5.2 650 and above

This is the minimum credit score required for a $0-down mortgage or to borrow the funds for a down payment from a line of credit or credit card. The GDS and TDS ratios are reduced to 35% and 42% respectively.

5.3 600 and above

This is the minimum credit score for a 5% down payment. The GDS and TDS ratios would be 35% and 42% respectively.

5.4 500 and above

A credit score in this range will necessitate at least a 20% down payment and you will likely have to approach an alternative lender or a private lender.

5.5 Below 500

With a credit score in this category, you can expect to make down payments as high as 35% through either a private lender or an alternative lender. Unlike banks, private lenders and alternative lenders are usually only accessible through a mortgage broker.

6. Quick Tips to Improve Your Credit Score

6.1 Decreasing Utilization

Reducing utilization, the percentage of your credit line currently in use, is one of the fastest ways to improve your credit score. For instance, if you have a credit card with a limit of $1,000 and you currently have a balance of $900, your utilization would be 90%.

6.2 Impact of Over-Utilization

Over-utilization of credit lines can significantly impact your credit score. If your credit lines are utilized more than 50%, it begins to negatively affect your score. If you are currently over your limit on any credit lines, your credit score will significantly decrease.

6.3 Reducing Utilization

Paying down the over-limit credit lines first, followed by paying off the next highest utilized debt, is the most effective way to reduce utilization. Ideally, each line should be paid down to 50% or less of the limit. If you can pay them down below 50% or even to $0, this will further improve your score.

7. Importance of Credit History

Even if you have a credit score above 650, you can still be denied a mortgage due to inadequate credit history. For lenders, it’s crucial to have established credit history for approving a mortgage. To ensure this, following the “2-2-2 Rule” is recommended: 2 credit lines, 2 years of history, with a limit of $2,000 or more on each.

8. Revolving Accounts and Guaranteed Credit Cards

At least one of your credit lines should be a revolving account, such as a credit card or line of credit. If you are unable to get a credit card by applying to a bank, you will need to get a guaranteed credit card (Capital One offers a guaranteed Mastercard and Home Trust offers a guaranteed Visa). A “guaranteed” credit card means that you secure the limit of your card with a deposit to the credit company.

9. Conclusion – Hope After Bankruptcy

From this comprehensive guide on how to get a mortgage after bankruptcy, it’s clear that bankruptcy does not put an end to your home-owning dreams. Various factors such as living in a rural area or intending to purchase a mini-home, cottage, or rental property can influence your qualifying ability. As every situation is unique, it is recommended to consult with a mortgage professional to understand the best course of action.

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