In the not so distant past, declaring bankruptcy branded people as deadbeats. Seriously, it was an embarrassing situation and the process’ tentacles reached out and squeezed every aspect of one’s life.
A 2010 study found that 25 percent of employers said they wouldn’t hire someone with a bankruptcy on his or her credit report, according to the Wall Street Journal. The general societal perception of the bankrupt was that they were irresponsible with their money – squanderers and cheats.
Declaring bankruptcy was, in a nutshell, degrading and humiliating and a closely guarded “dirty little secret.”
But, that was then. Times have changed and so have our views of bankruptcy. Whether it’s the degradation of society’s morals, as some claim, or the Great Recession’s effects on everyday Americans, bankruptcy is far more accepted with far less shame attached to the process. Heck, even our president has done it – numerous times.
So, how does a bankruptcy affect your ability to buy a home in Billings? Let’s find out.
Let’s cut to the chase
Yup, a bankruptcy ends up on your credit report, and it will remain there for 10 long years. And, yes, it will wreck your credit score. In fact, the average score of someone with a bankruptcy on his or her record is 604 (the average score without a bk is 677), according to Experian. By the way, last year’s Experian National Score Index shows that
in Billings, the average Vantage credit score is 683 – higher than the national average.
At any rate, a bankruptcy makes you what is known as a “subprime borrower,” so expect to pay more for the money you borrow – at least initially.
What lenders want to see
When a loan underwriter (the guy or gal that has the final say in whether or not you get a mortgage) pores over your credit information and sees the BK, he or she will then look to see if you’ve changed your evil ways.
The underwriter will check your income to ensure that you have enough to pay your current bills with some left over.
He or she will also want to know if you’ve worked toward rebuilding your credit and, if so, how responsibly you are using credit at this point. This means not exceeding credit limits and you’re paying the bills on time.
So, it’s important to get to work on obtaining some sort of credit immediately after the discharge of your bankruptcy.
Ways to begin rebuilding your credit
No, it’s not easy to reconstruct a financially responsible credit report, but it’s not impossible.
Legally, you can’t file for bankruptcy again for eight years after this one is discharged so, believe it or not, you are considered somewhat of a good credit risk,
provided you have a steady income.
Start with your local credit union and pursue a secured loan. “One kind of secured loan involves borrowing against money you already have on deposit,” according to Bev O’Shea at Nerd Wallet.
O’Shea also suggests obtaining a secured credit card. Many banks, online and off, offer these and it works much like the loan mentioned above. You make a deposit and then borrow against it when you make purchases with the credit card.
Not all banks report secured credit card info to the credit bureaus, so make sure the one you choose does. Then, use the card responsibly and keep the balance to within 30 percent of your credit limit. Make ALL payments on time.
You’ll find tips, advice and card suggestions from other folks looking to rebuild their scores with a secured card in the My Fico forums.
How long will it take to buy a house in Billings after bankruptcy?
Well, it varies, but you should typically expect to wait about two years after the discharge of your bankruptcy to apply for a mortgage. Note the word “discharge,” because that’s the date that lenders will use.
Burn that date into your brain and use it as your end goal.
Don’t be in too big of a hurry, though. The higher you can build your score, the less you’ll pay for the mortgage. If you can get it up to at least 760, you’ll pay 1.5 to 2 percent less in interest than if your score is between 620 and 639.
Doesn’t sound like much, does it? That 1.5 to 2 percent decrease in interest means a savings of more than $150 a month (on a $200,000 mortgage, and $69,000 over the life of the loan).
For instance, with a $200,000 mortgage, and a credit score between 700 and 759, you will save $161 a month and more than $67,214 in interest over the life of the loan, according to the loan savings calculator at MyFico.com.
The lender-required waiting periods vary according to the type of bankruptcy you chose. If it was Chapter 7, expect to wait
- 2 years for an FHA or VA-backed loan
- 3 years for a USDA home loan
- 4 years if you want to go for a conventional mortgage
Remember, the clock starts ticking on the date of the BK discharge, not when you initiated it.
That two-year waiting period is actually a blessing – you can use the time to rebuild your credit and maybe end up with a less expensive monthly payment.