Home Buying after Bankruptcy

These credit reporting agencies collect information on what you make, where you work and live, how much you owe to lenders and your bill paying habits and then assign you a FICO score. Developed by Fair Issac & Co., FICO scores are used mostly by mortgage bankers to determine the likelihood that a borrower is a good risk. All credit scores involve statistical analyses of an individual's credit history. The highest FICO score is 850. A score of 620 or below makes obtaining future credit very difficult. Bankruptcy alone knocks 200 or more points from your score. Establish New Credit If you've lowered your credit score through bankruptcy, you must bring it up to be approved for a home loan. Start the process by rebuilding your credit. It sounds counterintuitive, but a good place to start is with credit cards. To reestablish credit, obtain two or three credit cards and maintain a low balance. In the past, bankruptcy didn't keep most people from obtaining new credit cards, but the rising number of defaults on loans and credit cards will probably change all of that. Keep your debt to credit ratio low, which means not exceeding 30 percent of your available credit. For example, you should not charge more than $1,500 on a card with a $5,000 credit limit. "If you are only making $3,500 a month and have three credit cards and you've charged them up to $25,000, then you're just going down the same road," Satnick says. Having too many credit cards won't work in your favor, either, but it's better to have two or three cards with small balances than one card with a large balance. And don’t cancel cards even if they're paid off and you don't plan to use them. Access to available unused buying power makes you a better credit risk. If you can get a new, unsecured card, expect to pay a significantly higher rate of interest. A secured credit card offers another option. They work a lot like gift cards because you pay money up front before you use them, and your expenditures are deducted from the balance. As a rule, secured cards carry low balances, usually $500 or less. Like unsecured cards, use them carefully and "refill" the card regularly to keep your balance low. Satnick says unsecured cards are not always useful because some don't show up on credit reports. If you do opt for a prepaid card, find one that reports to the major credit reporting companies and doesn’t charge outrageous up-front fees.

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