Declaring bankruptcy can be a tool if you find yourself deeply in debt and without a way of paying. Through bankruptcy, you free yourself from creditors’ and collection agencies’ letters and phone calls. You get to start over with a clean state. Well, almost…
After you have declared bankruptcy, it will appear on your credit report for at least six years. Lenders might consider you to be a high-risk candidate during this time, and it could be extremely difficult to get a mortgage after you have declared bankruptcy.
For someone who has declared bankruptcy to even be considered for a mortgage, the bankruptcy must have been discharged. A bankruptcy discharge is a court order that releases you from all debts covered in your bankruptcy. It prohibits creditors and collectors from engaging in any collection activity against you and takes away the common restrictions of bankruptcy. A discharge will usually take place 12 months after you have officially been declared bankrupt, although it can take longer in some circumstances, for instance if you fail to cooperate with your trustee.
Bankruptcy is no longer the permanent taboo that it once was, however, and there are ways to succeed in getting a mortgage once the bankruptcy has been discharged. Let’s look at some of them.
When you declare bankruptcy, you basically wipe your credit report. This includes details of any good credit history. Mortgage lenders will therefore see you as a high-risk candidate.
Some lenders, however, will work with people who have demonstrated the ability to build a good credit history after declaring bankruptcy. Rebuilding your credit history from scratch can take several years – it is highly advisable that you spend two years or more building up your credit history before approaching a mortgage lender.
The more recent your bankruptcy discharge, the greater the deposit you’ll be likely to need for a mortgage, and also the less you will be able to borrow. Those mortgage lenders that consider people who have only been discharged from bankruptcy for a few years usually also put higher rates and fees on their mortgages, alongside the higher deposit requirements. The UK government’s Help to Buy programme can help top up savings through an equity loan, thus allowing you to meet the required deposit for a house.
In addition, the Help to Buy scheme may also work with you to convince lenders that you ought to qualify for a mortgage, even if you have declared bankruptcy in the past. This can, however, be contingent on several factors, including you proving that you have a solid income and are working to pay off your debts.
It is still important to wait at least a few years after you have been discharged to apply for a mortgage. Some lenders, for example, will only consider you for the UK government’s Help to Buy mortgage scheme if you have been discharged for at least three years. The general rule is that the longer you have been discharged, the more lenders will be willing to consider your application. The Help to Buy scheme might also have an easier time pleading your case if you have been discharged for longer and you therefore have a longer record of good credit conduct under your belt.
You may already own an older home outright but be looking to move to a new one (perhaps because you want to truly start your life afresh after bankruptcy). However, it may be that the total cost of your desired new home cannot be covered by selling the old one. Here, you can use your current home as equity to convince a mortgage lender to consider you. The less money you are looking to borrow, the less of a risk you present to the lender. In fact, if the majority of the cost of the new home can be covered by selling your current home, there is a good chance of the lender overlooking the fact that you declared bankruptcy in the past.
Declaring bankruptcy can make it difficult to get a mortgage in the future. However, if you continue paying off debts not discharged in the bankruptcy and spend time building a good credit history, your chances of being approved for a mortgage will rise exponentially.
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