One of the most frequently asked questions we hear from our customers is “How high are mortgage interest rates after bankruptcy?” While there are many factors that go into the interest rate you qualify for, the good news is that there are several things you can do to positively affect your rate. Here are some factors and tips for you to know that can possibly help you get lower mortgage interest rates after bankruptcy.
Factors That Will Affect Your Mortgage Interest Rates After Bankruptcy
There are two common types of personal bankruptcy, Chapter 7 and Chapter 13. The most common type of bankruptcy is Chapter 7 and it normally results in cancellation of all your previous debts by liquidating your assets. Chapter 13 bankruptcy is known as reorganization bankruptcy, and in it your previous debt is reorganized into a manageable repayment plan over three to five years. Even though bankruptcy can severely affect your credit, it’s possible to improve your creditworthiness to the point where you can obtain a mortgage with competitive interest rates.
1) Bankruptcy’s Effect on Your Credit Score and your Interest Rate
Depending on your financial situation it is not uncommon for bankruptcy filers to see a drop in their credit score between 50 – 150 points. Your credit score is one of the most influential factors that affects your mortgage interest rate, as well as your ability to obtain a mortgage after bankruptcy. Don’t let your current credit score affect your decision to buy a house after bankruptcy. Many of our clients are able to rebuild their credit and their credit score during or after their bankruptcy by following our guide (Provide a link here to the other page)
There are four main credit score levels that have the largest effect on your interest rate:
- Below 620- Having a credit score below 620 usually incurs pricing hits due to increased risk of default. Peoples Bank has found that it is best to take steps to increase your score above this level
- 620 to 640- Although this is a small range the difference in rate can sometimes be as big as 1/4 %.
- 640 to 680- This is a common credit score range for many borrowers and usually doesn’t affect the interest rate either positively or negatively
- Above 680- Interest rates often improve by around 1/8% when your credit score is over 680.
2) How Your Current Debt Levels Affect Your Interest Rate
Your current debt level will have a major impact on whether you qualify for a loan, but will only affect what your mortgage interest rates will be if your Debt to Income ratio is too high to qualify for the loan products with the best interest rates. We suggest making regular on time monthly payments during your Chapter 13 plan and trying to not incur any additional debt in order to qualify for a new mortgage loan.
3) Loan Programs and Your Interest Rate after Bankruptcy
One of the factors that can make a large difference in the interest rate you receive is what loan program you qualify for. Usually the loan programs that have the best interest rate after bankruptcy are government backed programs like FHA, VA, and USDA. Portfolio loan options can often have slightly higher rates but can work for those clients that aren’t able to qualify for the government backed programs. The interest rates on Portfolio loans can be from 0.5% to 3% higher than government backed loans. There are several things that can prevent you from qualifying for a government backed loan like credit score, debt-to-income ratio, loan size, location of the property, and your personal income. It is best to speak to an experienced Mortgage Consultant to discuss your options.
Increase Your Opportunity for a Better Interest Rates After Bankruptcy
Understanding the filing for bankruptcy is not the end of your financial well-being is very important. You now are in a position for a fresh start.
Make your monthly payments on time
Consistently making on-time monthly payments can possibly lower your mortgage interest rates by increasing your credit score when you re-apply for a home loan after bankruptcy. Many loan programs have requirements that you must show that you have begun to re-establish your financial position and are potentially ready for a home loan again. Ensuring that your monthly payments are on time can help improve the appearance of your credit history to lenders.
Get a secured credit card
A secured credit card is a type payment form where you put down a cash deposit in order to get the card to use on your everyday purchases. Over time your card service company can increase your spending levels based on your cash deposits. As you continue to adhere to the limits of your secured card, you should see an improvement in your credit score and the interest rate you qualify for. Make sure that when you are making purchases on your secured card that you only buy what you know you can pay off. Also, try leaving a small balance on the card that you did not spend. Using this strategy to rebuild your credit, can possibly put you in a position to get lower mortgage interest rates after bankruptcy. For more detailed credit tips go here.
Check your credit file for errors after your discharge
Keeping an eye on your credit score after bankruptcy is essential. You want to make sure that there was nothing left on your record that is still affecting your credit negatively. Signing up for a credit monitoring service can help keep your score top of mind. Having visibility of your credit score can also help you know when you might be ready to take out a home loan or purchase a car.
Contact an experienced Mortgage Consultant
An experienced Mortgage Consultant can save you time and energy in your journey to a new home or a better mortgage. Here are some of the ways we can help:
- A detailed and thorough analysis of your credit report highlighting items that are both positively and negatively affecting your score. We also review the report for inaccuracies that are common with our clients that have had a bankruptcy.
- We review your goals and try to find options that fit what you are looking for instead of treating you like a number.
- We have made over a 1,000 loans to clients with a past bankruptcy and have geared all our products and efforts at provide the best products and service for you.
Published (April 18, 2019)
Author Peoples Bank Mortgage