Effect Of Bankruptcies And Foreclosures On Credit

A bankruptcy or foreclosure is not the death of your credit. Yes, your credit score will be hurt and you won't be able to borrow from a traditional mortgage lender right away, but you still have options.

A bankruptcy or foreclosure signals a crisis in finances. Lenders understand this, and if there are mitigating circumstances, such as a healthcare emergency or loss of a job, they will make exceptions.

Minimize Your Bankruptcy Or Foreclosure

To minimize the effect of your bankruptcy or foreclosure, include a one-page letter in your credit report stating the reasons for the financial crisis. Lenders want to know that this was a one-time event, not a sign of financial irresponsibility.

While including the letter in your credit report, review all your accounts and be sure they are accurate. After a bankruptcy, creditors may leave open accounts, even when they should be closed. These open accounts can have a negative impact on your credit score.

Appeal To Mortgage Lenders

To appeal to mortgage lenders with a bad credit history, increase your down payment and cash reserves. A large down payment ensures that the mortgage company will receive at least a partial return on their investment if they have to foreclose. A FICO score of 580 will require at least a 5% down payment, and lower scores will require a larger down payment.

Cash reserves ensure that the borrower has enough resources to weather a temporary financial emergency. Mortgage lenders like to see at least two months worth of payments in a savings account, but a higher amount will only help your application.

Online Mortgage Brokers

Online mortgage brokers also make it easier to find financing for people with adverse credit. Through their websites, you can compare multiple finance offers from different lenders, ensuring you get the best rates and terms to buy a home.