At Jacoby & Jacoby, we’ve helped countless families and individuals find a fresh start through bankruptcy. If you’re interested in learning how bankruptcy can help you achieve financial stability and homeownership, give us a call at (888) 452-2629 to schedule a free consultation.
Most people associate bankruptcy with financial ruin and the inability to secure credit. Luckily, life isn’t Monopoly, and declaring bankruptcy isn’t always a bad thing.
For people who are drowning in insurmountable debt, bankruptcy can be a godsend; it gets the creditors off their backs and gives them a chance to start over financially. Despite negatively impacting a person’s credit score (at least for a time), bankruptcy doesn’t make securing a home loan impossible; some prospective homebuyers actually benefit from declaring bankruptcy.
Of course, that’s not something lenders are eager to broadcast. Creditors and financial institutions have a vested interest in you NOT filing for bankruptcy; afterall, if your slate is wiped clean from outstanding debts, they never get paid back.
As experienced bankruptcy lawyers serving Long Island, we understand that filing for bankruptcy is scary—especially if you’re hoping to buy a home in the near future. Although bankruptcy takes a toll on your credit score, its impact is temporary—and potentially less detrimental than years of unmitigated, mounting debt.
This article will discuss everything you need to know about getting a mortgage after bankruptcy, ways to rebuild your credit score, mortgage loan options and more.
Feeling crushed by debt? As the number one bankruptcy filer in the State of New York, Jacoby & Jacoby has the expertise and resources you need to make a fresh financial start. Contact us online to schedule a free case evaluation.
How Does Bankruptcy Impact Credit Score?
It’s no secret that bankruptcy can negatively impact credit score, and as it’s a crucial factor lenders use to evaluate your loan applications, would-be borrowers may be especially concerned about filing for bankruptcy. However, credit score isn’t the only factor to consider.
Negative Effects of Bankruptcy on Credit
When people discourage bankruptcy, they typically reference its impact on your credit score, but that’s not the only potential detriment. The following are among the most notable negative effects of filing for bankruptcy:
- A lower credit score. Filing for bankruptcy can cause a significant drop in credit score, but the extent of that drop depends on various factors, including pre-bankruptcy credit score, the type of bankruptcy you filed and your overall credit history.
- Challenges in obtaining new credit. Lenders may view you as a higher risk borrower than people with a higher score and be hesitant to offer you new credit and loans. It may also limit your borrowing options, especially immediately after you’ve filed.
- Unfavorable borrowing conditions. If you are approved for credit or loans, your lender may set less favorable terms and interest rates than they would with other borrowers who have a higher credit score.
It’s important to understand that the negative effects of bankruptcy on credit aren’t the same for everyone. It depends on an array of factors, including credit history, financial circumstance and post-bankruptcy financial actions.
Potential Benefits of Bankruptcy on Credit
Most people assume that bankruptcy only has negative repercussions, but that’s not true. In fact, there are numerous potential benefits to filing for bankruptcy, including the following:
- Debt relief. By eliminating or restructuring their debt, bankruptcy allows some people to start over with a clean slate. In addition to a reprieve from creditors, it provides an opportunity for better financial management.
- The chance to rebuild credit. Despite taking an initial hit, your credit won’t stay low forever—as long as you practice financial responsibility after bankruptcy. Without large amounts of debt to contend with, you can make timely payments and keep credit utilization low, both of which will improve your score.
- Improved debt-to-income ratio. By reducing your debt burden, bankruptcy can improve your debt-to-income ratio, and eventually make you a more attractive borrower to lenders.
Rebuilding your credit will ultimately take time, diligence and a commitment to financial responsibility, but it is entirely possible. For some people, it’s the best option to prepare them to eventually take on a mortgage.
Mortgage Loan Options After Bankruptcy
In most cases, you can’t remove a bankruptcy from your credit report. However, many people can improve their credit score in the 12-18 months after bankruptcy if they take the right steps.
Typically, higher credit scores suffer more from filing for bankruptcy than lower credit scores. For example, someone with an excellent FICO score (between 800 and 850) experiences an average 200-point drop as a result of bankruptcy. In contrast, someone with a fair score (between 580 and 669) may only see a 130-point drop in their score.
These penalties, while improvable, can present significant barriers to those who want to buy a house directly after bankruptcy. However, traditional home loans aren’t the only option. Prospective homebuyers who’ve recently filed for bankruptcy can also explore the following:
- Federal Housing Administration (FHA) loans. The FHA offers loans with more lenient requirements than traditional ones to people who’ve filed for Chapter 7 and Chapter 13 bankruptcy. Whereas the waiting period for people who filed Chapter 7 bankruptcy is typically two years after filing, people who filed for Chapter 13 may be able to take advantage of this offering in as soon as one year.
- Department of Veterans Affairs (VA) loans. Eligible veterans and service members may be able to secure a home loan through the VA. Although the waiting period varies, eligibility typically begins two years after bankruptcy.
Additionally, subprime loans may be an option for those who want to pursue a home loan after a recent bankruptcy. However, it’s crucial to understand that these types of loans may have exorbitant interest rates and fees, which is why it’s essential to carefully evaluate the terms before agreeing.
Jacoby & Jacoby: Top Bankruptcy Attorneys in Long Island, NY
If you’re suffering with overwhelming debt, bankruptcy may present a viable option for financial recovery. However, some bankruptcies also present a challenge to home ownership. The best way to find out if bankruptcy is right for you is by speaking with an experienced, compassionate attorney.
Luckily, the legal team at Jacoby & Jacoby is here to help. As leading bankruptcy lawyers in New York, we specialize in helping our clients overcome debt in the most advantageous way possible. Ready to get started? Contact us online or give us a call at (888) 452-2629 to schedule a free consultation today.