Our bankruptcy was discharged more than three years ago and we would like to buy a home in the near future. How much time must pass before we can qualify for a mortgage? After we filed our bankruptcy, we stopped borrowing money and paid cash for everything. What should we be doing to build good credit and how long will the bankruptcy impact our credit scores?
Elizabeth, Grand Junction
When you first filed bankruptcy, it can have a substantial impact on your credit score by up to 100 points or more. It will have a negative impact on your score while it is on your credit file, but after two years you should see less of an impact on your score. Until the bankruptcy falls completely off your credit report, it will continue to have a small impact on your score.
Before I spend more time on how a bankruptcy impacts your score and what you should be doing now to build good credit, let me answer your first question. The good news is that you can qualify for an FHA or VA loan now since the waiting period is two years from the discharge date. USDA is based on three years from the discharge date to the date of the loan application. Depending on the loan size, if FNMA or FMAC is required (also known as conventional) you will need four years from your discharge date or dismissal date. I encourage you to meet with your lender and they can determine which loan you could qualify for at this time.
When you filed for a bankruptcy, it was most likely a Chapter 7 or a Chapter 13. A Chapter 13 will stay on your credit report for seven years from the filing date. A Chapter 7 will stay on a credit report for 10 years from the filing date. All creditors that you included in the bankruptcy will remain on your credit report for seven years, whether it was a Chapter 7 or 13.
In addition to the bankruptcy showing up under public records, most creditors included in the bankruptcy will show “included in bankruptcy,” which will also negatively impact your score. Occasionally these creditors will continue to report the account after the bankruptcy is discharged since they can do this for seven years. By continuing to report it, this will bring the reporting date current and it will continue to have a negative impact on your scores.
While filing a bankruptcy will significantly impact your credit score, it will not be permanent. I can imagine the last thing you would want to do is borrow money after you have filed a bankruptcy. However, I encourage you to get two to three secured credit cards and/or lines of credit to reestablish your credit. Most banks and credit unions offer secured credit cards or lines of credit. You provide them a small amount of money (collateral) to establish a credit limit and you use them the same way as an unsecured credit card. Most important, make sure they will report to all three credit bureaus (Equifax, Experian and Trans Union) so you get credit for these new accounts and your payment history. Keep your balances low and make your payments on time. This will be the best way to build new credit and improve your credit score.
I hope this provides you a plan to rebuild your credit.
Branch Manager, NMLS #1721861
Cherry Creek Mortgage Co., Inc. NMLS 3001