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Dear credible money coach,
I have bankruptcy on my record, but my credit rating is increasing. It is now 650. What should I do to be able to get a mortgage, if it is still possible? – Put on
Hello, Don. Reconstructing your credit after bankruptcy is no easy task, and I applaud your progress! A credit score of 650 is a fair score by FICO standards, so while your score may not yet be where you want it to be, it is far from the worst it can be.
It is possible to get a mortgage after bankruptcy, and it is possible to get a mortgage with a good credit rating. While these factors combined can make things more difficult, it is still possible to get a mortgage when your low, but rising credit rating is due to bankruptcy. The caveat, however, is that the lower your score and the worse your credit history, the more likely it is that you will get a higher mortgage interest rate than you would like.
Here are some ways to get the best possible mortgage deal.
Option 1: Give yourself more time
When it comes to negative information on your credit reports, time is the best healer. You didn’t say when your bankruptcy happened, but it usually stays on your credit report for up to 10 years, depending on the type of bankruptcy.
If you are able to wait until bankruptcy brings your credit reports down and work on improving your scores, you may find it easier to get a mortgage and do so at a lower interest rate.
Option 2: work on your credit scores now
If it takes years for bankruptcy to hit your credit reports, or if you are convinced that the time is right to buy a home, your best option is to spend a few months improving your credit score as much as possible. .
Actions that improve credit include:
- Pay your bills on time each month, as agreed with the creditor.
- Be up to date on all overdue accounts.
- Pay off credit card balances.
- Open a secured credit card to expand your range of credit accounts and create a positive payment history.
It is important to understand that while these actions are helpful, you cannot achieve great credit scores overnight.
Option 3: Look for a mortgage for fair credit
You can shop around for a mortgage while increasing your credit. However, increasing your scores first will make it easier for you. Certain types of home loans have lower credit score requirements than conventional mortgages. Here are three you might consider:
- FHA loans – The Federal Housing Administration insures these mortgages, which private lenders do. It is possible to qualify for an FHA loan with a credit score as low as 500 (although you must make a down payment of at least 10%).
- USDA loans – If you have low income and want to buy a house in certain rural areas, you may be eligible for a USDA loan. These loans have no minimum credit score requirement.
- VA loans – If you or your spouse are veterans or active duty members, you may be eligible for a VA loan, which also does not have a minimum credit score requirement.
Keep in mind that while you may qualify for a federally guaranteed loan, your fair credit rating and past bankruptcy may mean that you will get a higher interest rate or less favorable terms than if you had a higher credit score and a clean credit history. .
One last word…
Although interest rates are rising, today’s low rates make it a great time to buy a home. But if your credit scores and bankruptcy are making it difficult to get a mortgage at a good rate, now might not be a good time to get a mortgage.
And it’s important to remember that bankruptcy only wipes out your debt (all or part of it), it doesn’t necessarily resolve the underlying circumstances. If you’re still having financial problems, getting a mortgage will likely make your situation worse.
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About the Author: Laura Adams is a personal and small business finance expert, award-winning author and host of money girl, a top rated weekly audio podcast and blog. She is frequently cited in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her work as a speaker, spokesperson and advocate. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.