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Mortgage Financing Options After Bankruptcy

By Tabitha Naylor

Although finding financing to buy a home after bankruptcy is challenging, it is possible. A homebuyer can apply for a mortgage as soon as two years after a bankruptcy has been discharged, or they can look for a properties that are "owner carry" or "owner will finance."

If you want to go the for a conventional mortgage there are several things you should do prior to applying. The first is to make certain your credit report is accurate and that all debts have been properly closed and discharged. Have any errors corrected because they will continue to erode your credit score.

Check to make sure that all official documents like court foreclosure actions, property deeds, property tax records, and credit report all have the correct foreclosure date if your home was also foreclosed. Lenders will count three years from the date of the foreclosure before they approve a new mortgage.

Pay any ongoing loans that survive bankruptcy on time and apply for a secured credit card as soon as possible. You want to apply for cards that report to one of the three major credit reporting bureaus. Secured cards require you to pay and hold a certain amount of money in an account and then lend you up to a matching amount as a credit limit. Make small purchases regularly and pay them in full when the bill comes. This will help rebuild your credit rating. You should also attempt to get a higher interest rate unsecured credit card. Store credit cards are generally the easiest to get. Pay whatever you purchase off every month in full during the grace period. That way you won't be accruing that high interest rate.

Take out a loan to finance your next large purchase, like a car, regardless of whether you need the loan, or the interest rate is high. Buy something that is easily affordable on your salary. Scale down your purchase if necessary. Make timely payments and try to pay it down faster than agreed upon by making larger payments or extra payments. This will demonstrate your fiscal responsibility.

Once your bankruptcy is at least two years old, and you have reestablished a clean credit history, you can apply for an FHA or VA mortgage. You will need to be able to explain why you ended up in financial difficulty, as well as explaining what you have done to fix your financial situation and how you plan to avoid any financial problems in the future.

Another option is to locate properties where the seller is willing to assume the financing. Instead of getting a mortgage through the bank, the seller agrees to finance the transaction. The seller extends enough credit to the buyer for the purchase price of the home, minus a specified down payment. The buyer and the seller sign a promissory note that contains the terms of the loan. They record a mortgage or "deed of trust" with the local public records authority and then the buyer pays back the loan over time, with interest to the seller. Most of these loans are short term-they are basically set up as 30 year mortgages but with a large balloon payment due in five years. This generally allows the buyer enough time to see a big enough gain in value, or the seller has enough time to get their finances and credit in good enough shape to refinance with a traditional lender. Most individuals willing to provide seller financing have paid off their home, or the down payment will payoff anything remaining on the mortgage.

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