Many of our bankruptcy clients obtain a 725 or higher FICO Credit Score within a year after Bankruptcy when they follow these rules. Regulations require you wait 2 years after the bankruptcy discharge to get a VA, FHA, or HUD mortgage and 3 years after a foreclosure. The foreclosure actually has most than twice the effect of a Chapter 7 bankruptcy in damaging your credit and getting a mortgage later. On average the foreclosure will take over 4-5 years before it stops damaging your credit and you can have another home. You can have another home about 2 years and 4 months after you file a Chapter 7 bankruptcy.
Changing your budgeting skills and habits allows you to become and stay financially successful. Most people can buy a car within 6-12 months after the discharge. In 2017 this is at about 6%. You can buy a used car during a Chapter 7 or 13 but the rates will be slightly higher in 2017 about 14%. A Bankruptcy case closes after about 4 months in a Chapter 7 and 3 or 5 years in a Chapter 13. As soon as the case closes you can start to repair your credit. If you work on just 6 areas of what controls your credit score your FICO credit score will immediately improve within months after the discharge. Accounts should be reported as account closed after discharge not as delinquent.
How FICO and Bankruptcy work
Bill Fair and Issac were Engineers and Mathematicians who created FICO credit scores which range from about 300-850. The three credit bureaus all use Fico but creditors may report to any combination of the three reporting agencies Equifax, Experian and Transwestern which explains why scores vary from one service to another. If you reaffirm after a bankruptcy the payments will be reported. If you need to refinance your mortgage later it is important to reaffirm.
Lenders have their own self interests in mind when they lend to you. The worse the lender the more the lender will want your score to remain low so you don’t go to competitors for better rates. For instance, buy here pay here car lots do not report on time payments to credit bureaus to keep customers coming back. Some credit card companies also work to keep your credit scores low so you can not leave them. If customers improve their scores they obtain lower rates and abandon subprime credit cards, mortgages and car lots.
Be very wary of the smiling face you are talking to at a car lot or mortgage company. Mortgage brokers and car finance managers are paid more by selling the high rate subprime loans. Customers are often lied to by loan officers who could have gotten you better loans just because they can make higher commissions from the bad loans. With a 725+ score you leave this behind for lenders who want your business.
Five major factors which improve your FICO and qualify you for a mortgage:
- Types of credit you want different types of credit to show you pay regardless of what kind of loan you have. Obtain 2-3 revolving (credit card or department store) accounts and 1 installment account such as a car loan and pay on time. This is 10% of your score. Keep the amount or percentage of the credit you use low.
- Inquires Don’t be desperate for credit and allow inquires. Inquiries damage your credit. Inquires account for 10% of your score.
- Account Age How old your accounts are is another important factor. The depth (age) of your credit history accounts for about another 15% of your FICO score. Don’t skip from one lender to another unless you have to. A history of on time payments with Chase for 15 years has more impact on your score than being with Capitol One for the last 6 months.
- Balances. You want high limits on the cards but you don’t want to have your accounts charged up to the limits. This is why it is important to have your credit cards report your limits and target your balances at below 30%. Having low balances on your accounts and not over utilizing accounts is 30% of your score. Keeping a small balance also wont cost you much in interest or fees.
- Payment History Paying regularly and on time accounts for another 35% of your score. One late payment or mistake will not kill your FICO score but it may deny you a mortgage. Not paying on multiple accounts recently kills your credit and may drop it 100 or more points. Old history only has a minor effect on your credit. As a bankruptcy or judgment gets older it has little effect within 1-2-3 years. But multiple accounts going unpaid recently will have a major impact on your score. To help establish a history of on time payment try making automated payments with your accounts.
Factors that help you get a Mortgage include:
Your credit score, ability to repay (income), cash in the bank (savings and liquidity), and how large a down payment you have. To qualify after a bankruptcy, we suggest:
- Opening up a Savings account and put money into it for your down payment over time after you have filed bankruptcy.
- Mortgagors won’t lend to you with less than a 620-630. They will fight for your business at 725+
- You need a history of on time rental payments use your checking account to prove on time rent payments.
- Use a mortgage banker for lower rates not a mortgage broker who deals with higher rates and riskier mortgages.
Six Steps to a 725+ Credit Score after bankruptcy and qualifying for a mortgage
Utilize only 30% of your credit limit.
Charging your cards to the limit is death to your score. Only charge about 30% of your credit limit on any card if you are trying to qualify for a mortgage etc
a) If you can’t pay your balances off within a 1-2 years, consider filing bankruptcy. Yes, bankruptcy will drop your score 50 points or so. Studies show if you can’t pay off your debt within a year, you are better off filing bankruptcy and getting a fresh start. Using bankruptcy when it is necessary is a financial tool to increase your wealth.
Paying your debt on time after filing bankruptcy will put you on a path to a 725 or better score. Being in debt for 10 years and paying cards late will insure you never own a home. Banks will consider your mortgage application 2 years after a bankruptcy discharge. They won’t touch an application with late payments.
b) Don’t average the cards and have one card maxed out and two cards with a zero balance. All of them should be below 30% and have some monthly charges being made. Consider using cards to pay the utilities and paying the cards each month.
c) Transferring funds or increasing credit limits works to get cards below 30% but some cards may refuse to report your limits to bureaus to keep you captive as a customer. By keeping your credit score low, they discourage other lenders from offering you better terms. In such cases you may have to dump that lender. Don’t open over 3-4 lines of credit. Higher credit limits mean higher scores if they are reported.
d) Become an authorized user on someone’s account if you can’t get a credit card with a bank immediately. You don’t have to make charges on Moms account, but if her score is high, being on her account as an authorized user will increase your score and will normally allow you to more easily open accounts a couple of months later.
Have credit variety get a revolving line of credit and one installment loan with depth
a) Have and use old accounts. Not using accounts means they become inactive after 120-180 days and you start over. Do not close accounts. You need deep long term history of business with lenders. Having additional accounts will not improve your score and increases the risk you will go into default.
b) Don’t constantly apply for credit. The fewer accounts you have the fewer inquiries. Don’t fill out an application to get a coffee cup. It costs you more than the T shirt they give out. Fewer inquires mean higher scores and that you are desperate for credit.
c) Pay your utilities with your credit card and then pay the credit card with automated payments from checking. You wont forget to pay the credit card if the payments are automated. You can average your utility bills while increasing your score. If there are no annual or monthly fees and you don’t otherwise use the card you will just increase your credit scores.
Verify your reported credit limits/reports.
Some lenders work to lower your score to keep customers. They wont report on time payments and do report every late payment. Such lenders include finance companies and buy here pay here car lots. Check how the lenders are reporting your credit.
a) Some credit cards do not report your true limit and instead report your balance as the credit limit or highest balance. That shows if you are charging 100% of your limit. They also may not report your on time payments or may not report. If a lender does not report your credit limits and on time payments close the account
b) Buy Here Pay Here care lots also intentionally lower your scores to keep you as a customer and refuse to report on time payments to keep you captive. You want Bank installment credit for your car loans. Credit Unions and finance companies are given less impact than bank loans. You can only catch these errors by examining your credit report occasionally.
c) After bankruptcy your report accounts should show an account is closed not account delinquent. We have a service we recommend for correcting this.
Check the accuracy of your credit file and remove errors
85% of credit reports have errors. 40% have serious enough errors that it would prevent you getting a home mortgage. Checking your own file has no effect on your score and you should check it 2-3 times a year.
a) Most credit improvement services only have a 35% success ratio and only suppress a credit item temporarily. There is a huge difference between temporarily suppressing an item and permanently deleting it. Even the best companies only have a 70% success rate.
b) Only negative information, recent missed payments, duplicate collections for the same debt and accounts that are not yours are a high priority. Concentrate on recent activity (less than 2 year old errors). Bankruptcy items reported as delinquent instead of account closed are errors. Information that is not yours is often identity fraud. Incorrect addresses may mean utility bills being charged in your name.
c) If you go through a divorce do not expect your spouse to pay joint debts. Joint debts will effect your credit score regardless of your divorce court order requiring your ex spouse to pay it. If you go through a divorce it may be better to file bankruptcy rather than struggle with unpaid debts they promised to pay. Never co-sign a debt. But if you do cosign a debt, checking your credit file may alert you to any non payment. The creditor may not call to collect from you and may file a lawsuit or send it to collections instead.
Do not pay collections over 2 years old.
After 24 months a collection item has little or no effect on your credit and tends to fall off. Paying an old collection only lowers your credit score. It becomes a recent activity after you pay it. Paying any payment or admitting you owe the debt also restarts the Statute of limitation.
In Kentucky a payment or admitting you owe the debt makes the debt collectable for another 15 years. Paying a collection item rewards the debt collector for calling and may invite other old debts to renew their efforts to collect old charged off accounts. By talking to them you will often admit you owe the debt and your conversation is recorded for evidence later. It is unlikely for them to sue over a small debt. Paying the item will not repair the damage after the item is reported as delinquent. However a mortgage company may require you to pay a recent collection to get a mortgage.
a) Get a letter of deletion before paying any collection if you must pay a collection item. Paying the collection at a home closing has no impact on improving your score and getting a better rate.
b) If you are sued it is often better to defend a collection lawsuit and perhaps sue the lender or collector back. Lawsuits are only reported to a credit report agency as a negative item if you lose the case and they obtain a judgment.
Open a Savings/retirement account or other means of savings
a) Banks often verify the down payment when you apply for a mortgage.
b) The history of saving shows you have emergency funds to cushion when problems occur.
Summary for How to get a 725 FICO Credit Score and Mortgage After Bankruptcy
Sweep your credit file after a bankruptcy to eliminate the untrue, outdated and misleading information which may not even belong to you. After filing bankruptcy your discharged debts should show as being closed not delinquent. Make sure the few debts being paid after filing are being reported as paid on time. Buying a new car or a home only requires a 630 or better FICO score. But at 725 you can get a much lower rate and monthly payment or perhaps qualify for a much larger home at the same monthly payment. It takes 5 years to get deep roots to your credit but you can have 725+ in 1-2 years after a bankruptcy and you can recover by following these rules.
Items you need to get a 725 FICO Credit Score and Mortgage After Bankruptcy
Make it a project. Just filing bankruptcy won’t change your life. In many law offices you just walk in and walk out after preparing a bankruptcy petition. Our clients don’t just file bankruptcy we make sure they have what they need after the bankruptcy to recover. These free or low cost items include a credit repair service and Dave Ramsey’s Financial Peace University course. If you didn’t get such items from your bankruptcy attorney check out our blog pages and information.
Unless you make changes you will often just go back to doing the same things you did before. If you don’t change, you continue to get the same results. Within a couple of years you are back filing the same bankruptcy or divorce a second and third time. Changing how you budget and handle money makes a permanent change so you and your children never have money problems. When you get ready to file bankruptcy see us and we can talk more on how to get a 725 FICO Credit Score Mortgage After Bankruptcy