When it comes to your credit, the two worst things you can have on your credit report are bankruptcy and foreclosure. So having both of them might seem like the end of your world financially. However, that’s not the case. Although foreclosure and bankruptcy will devastate your credit score for a while, nothing in the credit world lasts forever. The answer to the question, “Can you get a mortgage after bankruptcy and foreclosure?” is a resounding, “Yes!”
How Bankruptcy and Foreclosure Affect Your Credit
Bankruptcy is the most damaging item you can have on your credit report. It stays on your report for up to ten years, so it will take a long time to completely eliminate it from your record. A foreclosure, on the other hand, can only remain on your credit report for seven years. Still, seven years is a long time to have two huge negative marks on your credit.
However, just because you have negative information on your credit report doesn’t mean you won’t be able to get a mortgage when you’re ready to buy another home. It is unlikely that you will have to wait a full seven years to buy another house, but you probably will have to wait at least two years.
Rebuilding Your Credit to Qualify for a Mortgage
If you hope to buy another house someday, you should start working at rebuilding your credit immediately following your foreclosure and bankruptcy. The first thing you need to do is to make a commitment to live below your means from here on out.
Why below your means? Because there will always be emergencies. You need to keep your living expenses low enough that you can put at least 10% of your income into savings. When an emergency arises, keep your credit cards in your pockets and raid the savings account instead.
You’ll Probably Need a Secured Credit Card
Once the bankruptcy is discharged, you’ll need to get a credit card to start re-establishing your credit. I hate to advise someone who has just been through a foreclosure and bankruptcy to go out and get a credit card, but credit cards are almost essential to building a good credit rating. So you have two options: get a credit card or learn to live without credit. If you can’t control your spending with a credit card in your possession, you might want to seriously consider the second option.
Assuming you chose to apply for a credit card, you’ll probably find that you’ll need to get a secured card. You are unlikely to qualify for anything else at this point. A secured credit card requires a deposit that is usually equal to the amount of credit you will have. For example, if you want a $500 secured credit card, you need to put up a $500 deposit. The credit card company keeps that $500 for the entire time you have the account open or until it is converted to an unsecured account.
That means you are paying the credit card company a ridiculous amount of interest plus an annual fee to borrow your own money. You’ll probably have to pay an application fee too. Why would anyone want to do that? Because every month that you pay your bill on time, it will be noted as a positive on your credit report, and you need that if you ever want to buy another house with a conventional mortgage.
Exercise Discipline with Your Secured Credit Card
If you use all of the credit available to you, prospective lenders will wonder if you can control your spending. The ratio of credit used to credit available can make a big difference in your credit score. You should never use more than 25-30% of the credit available to you.
So, for example, if you have a $500 secured credit card, don’t charge more than $125-150 and make sure you pay it off every month. The easiest way to maintain discipline in using your card is to choose one bill that you will charge on this card every month. If you have a utility company that doesn’t charge an extra fee for using a credit card, that’s a good choice. The bill comes once per month and there is no chance to add impulse items to the bill.
Don’t use your secured card for something like gas. It’s too easy to run in to the convenience store and add a pop and a candy bar to the tab. Those extra purchases add up. Choose a bill that can be paid from home so that you don’t have to carry your credit card with you. This will keep you from caving in to the temptation to use it for something you really don’t need.
Pay Everything On Time
The key to being able to get a mortgage after bankruptcy and foreclosure is rebuilding your credit, and the key to rebuilding your credit is to pay all of your bills on time, every single time. Keep your expenses low enough that you can save for a rainy day, get a secured credit card and use it wisely, and pay your utilities and all of your other bills on time every single month. If you do these things, you’ll have a chance at qualifying for another mortgage within 2-3 years.