Smart Credit Moves Before You Apply for a Mortgage
The first page of this chapter referred to the “baby steps” of credit recovery and the myths inherent in the process of post-bankruptcy credit. Yet before you apply for the biggest loan of your life, you have to create a positive picture for lenders by demonstrating success with smaller lines of credit leading up to a mortgage application.
Is it true I could apply for a mortgage loan the day after my bankruptcy is discharged?
Sure. And depending on your history, you might even get the loan. But you will probably pay significantly more for that loan in terms of interest and down payment, and your monthly payments will probably be much higher than if you waited. How long should you wait? Most experts say it's optimal to wait a year or two after your bankruptcy so you can prove better performance with credit. It's a pain that will pay off.
The idea is to get good information back into your credit reports that will raise your overall credit score over the ensuing weeks and months. Yes, the bankruptcy will be on those reports for at least seven years, but your goal is to show attractive credit behavior at all times post-bankruptcy. Though you should also seek solid advice from a qualified bankruptcy attorney or bankruptcy-trained financial planner to fit your exact situation, there are some general things you should do post-bankruptcy:
Discuss reaffirmation on secured loans that remain post-bankruptcy. Reaffirmation is the process of informing a lender, in writing, that you intend to keep making payments on their loan on time. This is most common for auto loans. However, there are certain reasons not to reaffirm based on certain situations, so discuss it with your bankruptcy lawyer or financial planner first.
Apply for a secured credit card at a conventional bank. A secured credit card is essentially a savings account with a branded credit card attached. Like a debit card with a credit card company's logo on it, you can spend only what's in that account. Establish a solid record of under-limit spending with speedy repayments. And yes, these cards charge interest like any other card, and that interest will be significantly higher than what the bank's best customers pay.
Most importantly, pay on time. Figure out the exact due date on each bill you have — secured credit card, auto loan, utilities, student loan, anything you have to pay on time every month — count back seven days from the due date on a calendar, and on that date write yourself a reminder to pay that bill.
Check your credit reports post-discharge. Experian, TransUnion, and Equifax need to show on their reports that all appropriate debts have been “discharged in bankruptcy.” If not, you need to correct that information. Again, it's good to get advice on this point on the correct wording that should appear on your credit reports.
If you can leave a zero balance, do it. This is advice you should follow for the rest of your life. Accumulating credit balances after a bankruptcy will slow your credit recovery, so make some sacrifices.
Make no overdrafts. Consider every relationship you build with a conventional lender, even for something as minor as a checking account or a secured credit card, an opportunity to work with them on bigger things. Conventional lenders, such as major banks, are usually the most stable names in the loan market. Even in rough economic times, they might offer a break to a post-bankruptcy borrower. Apply for credit, and handle your banking accounts like you're applying for a job.
Emerging from bankruptcy means developing new habits that need to become permanent. If you or someone close to you needs to file, the moment you make the decision is the moment you need to start changing the way you deal with credit.
