Get Out of Debt Guy

What Are My Chance of Buying a Home After Bankruptcy? - Ruth

Posted April 25, 2013

WRAL Reader Asks

I am a widow now and need to purchase a home

I went through bankruptcy at the end of 2005/2006 and want to know what are my chances of getting a loan to purchase a home.

I have purchased a car in 2007 and have paid good. No other credit. the last time I had my credit report checked was in Feb of this year and the score was 640. Also, what are my chances of getting a good interest rate.

Ruth

Answer

Ruth,

I've got bad news and good news. Let me get the bad news out of the way first. If you had followed the advice I'm going to give you you'd already be in excellent shape to get a mortgage. Since you have not done that yet, you'll just have to work hard at it and I would think it will take a year or so to get back to the better rates.

Now for the good news.

It is entirely understandable that when people file bankruptcy they either equate credit with pain and want to avoid it or they have heard all sorts of urban myths about not being able to get credit. Nevertheless, both actions scupper your chances of rebuilding your credit quickly.

The reality is it is not the credit that leads to problems. It's the debt. It's the debt we want to avoid, not the credit.

Rebuilding your credit after bankruptcy is something that should begin on the day you get your discharge papers. If you do that then within a year you'll be qualified for good rates on a car and within two to three years you'll be qualified for excellent rates on a new mortgage.

When you avoid new credit your credit history after bankruptcy ends on a downer. But think about your credit report like a report card in school. If you wanted to bring up your grade point average you needed better grades to do it. If you want to bring up your credit score you need good current credit to do that.

While having a car loan is better than nothing, it is a secured debt and counts less towards your credit score.

What you need to do is get a few unsecured major credit cards like a Visa, MasterCard, American Express, or Discover that report to the three major credit bureaus. There need to be credit cards, not debit cards with those logos on them. Debit cards do not build credit.

In my guide, How to Easily Rebuild Your Credit and Have Good Credit Again, I lay out the step-by-step process to getting your credit back in shape.

Right now your credit score is not great and unless we focus on bringing it up before you apply for your mortgage you are going to wind up paying much more than you need to through higher interest rates.

If you wanted to, get your consolidated credit report as I describe in the guide and bring it to the next Get Out of Debt Guy support group meeting in the Raleigh area and I'll look it over and point out any other issues that might need to be addressed. All of my help and services are offered for free to consumers so don't feel like there are any catches.

I'm confident if you get right on this and start rebuilding your credit, you will be able to get that mortgage in the future.

Steve Rhode
WRAL Get Out of Debt Guy

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4 Comments

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  • steverhode Apr 26, 2013

    @Terkel Who pays in higher prices. Can you give me a specific example of something that is more expensive?

  • steverhode Apr 26, 2013

    @common_tater I understand the issue but if you want to have great credit them you need to have good credit to be scored on. It's a bit like owning sharp kitchen knives and not using them to kill people with. If you want to have good credit then you are going to have to learn not to abuse the plastic. And as I said in the article, you can have good credit without having bad debt. But if you recognize that you can't personally handle having credit then you will just have to accept the credit scoring system is not going to work for you. Credit scores are not a measure of how wisely you manage your finances but of the odds of a lender being able to profit from you with and what the risk will be.

  • Terkel Apr 26, 2013

    common tater, you're being very smart. She, OTOH, wants to discharge her debts so all consumers take a hit because the creditors pass it along in the form of higher prices, then get a prime mortgage with very poor credit. She doesn't "get" how it works.

  • common tater Apr 26, 2013

    It's catch-22. Maybe she doesn't have credit cards because, like me, she knows she doesn't have the discipline to not run them up (and get into bankruptcy situation again). So for being smart and staying out of debt, she's punished with a bad credit score. It's a messed up system we've created.

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.