How to Repair Credit After Bankruptcy
Even if you’re able to afford yearly rent increases, you might hate the idea of spending more for housing and getting little in return. Buying a house, on the other hand, can provide predictable payments and stability. But if you’ve recently filed bankruptcy, your credit score might not be high enough, and the amount of time that has passed since you filed might not be long enough, for you to qualify for a home loan.
Although you’re unable to meet loan requirements today, it is possible to repair credit after bankruptcy and purchase a home with a favorable interest rate in the future.
Credit repair doesn’t happen overnight, so the sooner you start rebuilding your credit, the sooner you can get the keys to your dream home.
Get a secured credit card
You might hesitate to get a credit card after bankruptcy, especially if credit card debt contributed to the bankruptcy. However, you must use credit to rebuild credit.
If you’re uncomfortable with an unsecured credit card, apply for a secured credit card through your bank or credit union. These credit cards are easier to get if you have a less-than-perfect credit because they require a security deposit, which varies depending on the card.
Your credit line is based on your security deposit. Therefore, if you give the bank a $500 security deposit, you’ll get a credit card with a $500 credit line. This security deposit isn’t pre-payment for charges, though. You’ll still receive a monthly bill and you’re still required to make minimum monthly payments.
The bank will report your on-time payments to the credit bureaus, which can help build your credit score. After 12 to 24 months of timely payments, the bank may refund your security deposit and switch your account to an unsecured credit card.
Get a credit builder loan
You can also fix your credit after bankruptcy with a small credit builder loan or an installment loan. Keep in mind that getting approved may require a cosigner and/or collateral due to your lower credit score.
Similar to a credit card, timely loan payments build your credit score, making it easier for you to qualify for a home loan in the future. Be mindful that a credit builder loan will have a higher interest rate, so borrow a small amount and only what you need.
Check your credit report
It’s important to check your credit report — even after a bankruptcy. Although a bankruptcy stays on your credit report for up to 10 years and can reduce your credit score by 100 or more points, errors that remain on your credit report after a bankruptcy can further drive down your score. Correcting these errors, however, could possibly add points to your rating.
You’re entitled to one free credit report from each of the U.S. credit bureaus a year (Equifax, Experian, TransUnion). Order your credit reports directly from the bureaus, or request your free reports through AnnualCreditReport.com.
Dispute any errors or inaccuracies on your report. Also, pay special attention to items included in your bankruptcy. Make sure items discharged in the bankruptcy are reported as discharged and show a zero balance.
Pay your bills on time
Paying your bills on time is one of the best ways to improve your credit after bankruptcy. If the bankruptcy resulted in a repayment plan for debts, make these monthly payments on time. Also, pay other creditors on time. This includes your utilities, insurance, cell phone, and medical bills. This will help youavoid new collection accounts or judgments on your credit report.
If you’re unable to make a payment by a due date, contact your creditor to arrange alternate payment arrangements. This can stop late fees and new negative items from appearing on your credit report.
It takes time to rebuild your credit history after bankruptcy, so be patient. Periodically check your credit score to monitor your progress.
The good news is that you don’t need perfect credit to qualify for a mortgage. For a conventional loan, you need a minimum credit score of 620, and you can get an FHA home loan with a minimum credit score as low as 580.
But even if your credit score is high enough to get a mortgage, a certain amount of time must pass before you’re able to qualify for a mortgage. Typically, you can qualify for an FHA and VA home loan after two years; a USDA home loan after three years; and a conventional mortgage after four years. There are exceptions, however, and you may be able to qualify sooner depending on your situation.
Whether you have questions about down payments, loan requirements, credit, or various home loan programs, call us today and speak with one of our experienced loan experts for guidance. Buying a home after bankruptcy is possible and we can help get your foot in the door.