A Fresh Start: Obtaining Loans After Bankruptcy

Did you know that tens of thousands of people file for federal bankruptcy protection every month? Many filers do not realize that bankruptcy is common, and the process can be a road to a fresh start.

Contrary to popular belief, you can obtain a mortgage or refinance an existing home loan after bankruptcy. While notice of a bankruptcy filing does remain on your credit report for up to a decade, you can become eligible for new loan programs in as little as one or two years.

For example, mortgages guaranteed by the Federal Housing Administration are permitted one year after Chapter 13 bankruptcy and two years after Chapter 7 liquidation. The former type of bankruptcy typically involves repaying a portion of debts over a three to five year term, while the latter discharges most outstanding amounts almost immediately. Common mortgage guidelines from Fannie Mae and Freddie Mac require a waiting period of two to four years.

If you desire a mortgage or another type of loan after bankruptcy, the best thing to do is reestablish your credit. We can guide you through that process.

How to Improve Your Credit Score

A bankruptcy filing will impact a credit score. According to a July 2012 report by VantageScore, filing will reduce a credit score by approximately 200 to 350 points. Future loans depend on this number, so it is important to restore your credit after bankruptcy. Your score can typically rebound within a year or two.

To do this, pay all of your bills early or on time. Paying rent, utility bills and other financial obligations as soon as possible will aid in the creation of a solid credit score. Your outstanding credit balance makes up approximately 30 percent of your credit score. People with the highest credit scores generally carry small balances on their credit cards--balances less than 20 percent of their total available credit.

Also, unused accounts do not positively impact your credit score unless you use them sporadically. If you have a few accounts with little activity, use one and immediately pay off the balance. This will help raise your credit score.

Hardship Letters

If your bankruptcy was the result of a one-time occurrence, you can compose a hardship letter, which can help explain your financial situation to lenders. For example, if your filing was a consequence of a sudden family illness that spiraled into financial turmoil, you can write a letter to lenders explaining the event.

Most hardship letters include evidence of the event, such as medical bills or other verification. Also, if you managed to pay back most of your financial obligations, you should include this in the letter. Ultimately, the hardship letter could reduce your waiting period, permitting you to apply for a new mortgage even earlier.

These are just a few tips that can assist you in your journey toward a strong future. Bankruptcy is not the end of a financial battle--it is the beginning. If you need to restructure your finances, you may want to speak to a knowledgeable bankruptcy attorney about your options.

Article provided by Heller & Richmond, Ltd.
Visit us at www.affordablebankruptcychicago.com/

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