The Effects Of Bankruptcy On Your Credit Score

Nobody really wants to file for bankruptcy, but sometimes it is the right decision to make. Taking formal steps to show that you are no longer able to pay your debts can help you resolve your immediate financial worries. However, you do have to understand what the impact of those formal steps will be on your credit rating.

“A bankruptcy will always be considered a very negative event by your FICO score. How much of an impact it will have on your score will depend on your entire credit profile.”

It is inevitable that your credit score will decline as a result of the bankruptcy, and it is highly probable that it was already damaged due to the financial situation that made you consider or even file for bankruptcy. That being said, there are three main things that are likely to happen to your credit score, all of which can be fixed with patience and dedication.

1. Your Score Will Drop Significantly

If you file your bankruptcy, you will always end up having “bad credit”. If your FICO score was 700 or higher, which is a good score, it will likely drop by at least 200 points. If it was already not as good, for instance, at 680, it will likely drop by some 150 points. The type of bankruptcy you file for will also have an impact.

“Depending on the kind of bankruptcy you file, Chapter 7 vs Chapter 13 bankruptcy, your credit score will decrease anywhere from 160 to 220 points.”

2. The Damage Is Long Term

Your credit score will be affeccted for a long time by a bankruptcy. A Chapter 7 filing, for instance, stays in place for 10 years. Others, such as a Chapter 13, your included accounts, and discharged liens, judgments, or collection debts, will stay in place for seven years.

3. The Impact Diminishes with Time

The good news is that, as time goes by, the negative effects of a bankruptcy on your credit score will lessen. This goes quite quickly, in fact, because you will no longer owe any money on any discharged debt. This improves your credit utilization rate.

“The credit utilization ratio is the amount of outstanding balances on all credit cards divided by the sum of each card’s limit, and it’s expressed as a percentage. Credit issuers like to see a credit utilization ratio of approximately 35% or less.”

According to FICO, if your credit score was 680 when you filed for bankruptcy, it should be back at 680 within five years, presuming you got your financial behavior in order.

How to Rebuild Your Credit

If you want to rebuild your credit after you have filed for bankruptcy, you will need a great deal of patience to start with. However, you also need to be proactive and take steps to make things better. As such:

– Check your credit file to see whether the bankruptcy has been listed properly. There are numerous ways of checking your credit report for free and you need to take advantage of that to see whether all the debts have been marked as discharged and balanced at zero as agreed.

– Start over. Open a credit builder loan or a secured credit card, which are good starter lines of credit. This will give you the opportunity to show a positive payment history. Make your payments on time and keep the level of debt as low as possible.

– Keep checking your credit file. You should see it start to improve slowly but surely as time goes by and as you prove yourself to be financially stable.

– Check back after 10 (or seven) years to make sure all the elements relating to your bankruptcy have been removed.

Improving And Repairing Your Credit Score

The best thing you can compare credit repair to is weight loss. It takes time, it isn’t easy, and any quick fixes usually backfire. You need to be responsible, make real changes, and have patience. That said, there are a number of things you can and should do for improving and repairing your credit score.

1. Check Your Credit Report

The first thing you have to do is check your credit score, so you know where you stand right now and to check whether there are errors.

“Going without checking your credit score, or checking it every few years, isn’t enough. To have control over your credit and your financial life, you must check your credit score regularly.”

2. Have Payment Reminders

The next thing you have to do is always make any agreed credit payments on time. Hence, set up reminders on your phone or in your diary to make sure the money is in your account, and have those bills come out automatically. Do, also, make extra payments whenever you can because that looks really good.

3. Reduce Your Debt

Reducing your debt may sound hard, but it can be done. If you set those payment reminders and notice you have as much as a dollar more than you thought in your account, put that dollar straight towards any outstanding debt. Every little helps.

Other Important Tips

One of the things that really drops your FICO score is missed payments, although the exact impact will depend on your current score.

“The degree to which a late payment may affect your credit score can depend on multiple factors. When it comes to your FICO credit score, for example, a late payment will be evaluated based on how severe it is, how recent it is, and how frequently you’ve paid late.”

So, if you have missed any payments, make them straightaway. Do also make sure you’re not late on payments. The longer you wait, the more your score will be affected.

You also need to avoid your account going into collection as much as possible. This is because, even if you pay it off, it will still be on your credit report. Naturally, it will show up as being paid, but the mark would be there nevertheless. In fact, it will stay there for seven years. If you have legitimate difficulties, you need to contact your creditors about that as soon as possible. They don’t want you to have bad credit, they simply want to get their money back. And they know that, the worse your credit score gets, the harder it will be for you to pay for things.

Patience is also absolutely vital. The reality is that, once you have bad credit, you are likely to have it for at least five years.

“If you make a mistake or run into financial obstacles that result in negative items on your credit report, those derogatory marks will remain there for years. The good news is they will carry less weight in credit scoring formulas as they get older.”

Repairing Tips

Once you have bad credit, there are many things that you can do to start improving it as quickly as possible. These include:

– Keeping your balance on your lines of credit as low as possible

– Paying your debt off. Don’t move it to somewhere else.

– Getting rid of your credit car debt.

– Keeping your unused credit cards open, but keeping the balance as low as possible.

– Not applying for new credit cards in the hope of improving your credit

– Not opening multiple accounts very quickly, as this makes you look like a risk

New Credit

Another issue that people face is that while they don’t have bad credit, they simply have no credit. The result is that lenders don’t want to work with them, because there is no history for them to check. Not having a credit history can be very damaging.

“If you fall in the no-credit category, you haven’t necessarily made any financial mistakes. In this case, a good way to start building that history is to acquire a credit card for people with no credit.”

Tips On Refinancing Your Home Mortgage

If you have a mortgage with an interest rate of 5% or more, you may want to consider refinancing it. There has been a slight rise in interest rates as of late, but they continue to be historically low. On average, a 30-year fixed rate mortgage currently stands at 3.87%, or 3.11% for a 15 year mortgage. This means that if you pay more than that, you should consider a change.

Of course, there are other considerations to make as well. Refinancing your mortgage is only a good idea if it will will actually save money. This is particularly true if you have a limited amount of time remaining on your mortgage, and a new one would be paid over a longer period of time.

There are now numerous opportunities for people to complete a refinancing of their mortgage. Some of those are now actively warning homeowners against the lure of “rates as low as” advertisements. Additionally, they are concerned about how easy it has become to get approved for a mortgage.

“Traditionally, it would take one week to several months to be approved for a housing loan, all of that, of course, after you’ve spent weeks shopping for that loan in the first place. But with Rocket Mortgage, shopping for a loan and applying for it is a process that requires little in the way of time and effort.”

According to financial experts, what matters most is to understand the process of refinancing. This will empower people to make the right decisions in terms of their own finances. Additionally, it will help them avoid being drawn in by clever advertisements.

11 Tips on Home Mortgage Refinancing

1. Get your credit in order. It is very important to have a good FICO score.

“Just because you want to buy a home doesn’t mean that a lender is eager to loan you money. Lenders look at your past history in handling your finances, which is where the FICO score comes in. The FICO score boils your credit history down to a three-digit number that instantly tells a lender whether you are creditworthy. This score dictates what terms – if any – you will be offered in a mortgage.”

2. Know the value of your home. This means that you have to have an official appraisal completed as well.

3. Have all your documents in order. You will need proof of employment, assets, and income. The more documents you have available, the better.

4. Make sure you receive at least three quotes. Your bank should be one of those, but do also consider an independent broker. Remember that, unless these quotes are based on your actual credit score, the amounts mentioned on them may not be fully accurate.

5. Consider paying mortgage points. Mortgage points have the capability to bring your rate down.

“Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments.”

6. Make sure you compare the points, fees, and interest rates. This will allow you to get an accurate idea of what each option costs. There are also other fees to think about, like title costs, local taxes, and state taxes.

7. There is no such thing as a “no-cost” refinance deal. If you don’t have to pay any fees, it is because they have been built into the principal balance or the interest rate.

8. Work out whether lengthening or shortening your mortgage is a good idea. A new mortgage means that the payment term starts from scratch again, which means you may be tied down for another 30 years. There are also shorter mortgages, but that means paying more each month. Work out what will work out best for you.

9. Don’t take cash out unless you really know what you are doing. Sometimes, you can use cash out to increase the value of your home, for instance if you install a new kitchen. But if you take it out for your child’s college fund, for instance, you won’t get anything back for that.

10. Be aware of your closing costs. Those include the costs charged by the bank, your taxes, your title costs, legal fees, escrow, and more.

11. Don’t sign anything until you have properly reviewed all documents and the small print.

Understanding The Mortgage Approval Process

The mortgage approval process is quite complicated and hard to understand. Getting approved for a mortgage is down to a lot of different things. It is important that you understand the process, however, as this will increase your chances of getting approved.

The Process of Getting Approved for a Mortgage

When you put in an application for a mortgage, the lender you are working with will send the application itself and all the supporting documentation to an underwriter.

“An underwriter is an entity, typically a company, that is accountable for analyzing and assuming the risk of another entity. Underwriting typically happens behind the scenes, but is an important aspect of mortgage approvals. The mortgage underwriting process has 5 key steps: verification, appraisal, title search and insurance, flood certification, and surveying.”

The underwriter is responsible for looking at the scenario you are proposing and will determine whether it meets their guidelines. They will ultimately decide whether or not you meet the necessary qualifications for a loan. There are a number of specific criteria that they will look at, the most important one being whether you will be able to pay the loan back.

The Debt-to-Income Ratio

To determine your ability to repay a loan, the lender will calculate your debt-to-income (DTI) ratio

“To calculate your debt-to-income ratio, add up your total recurring monthly debt (such as mortgage, student loans, auto loans, child support and credit card payments) and divide by your gross monthly income (the amount you earn each month before taxes and other deductions are taken out).”

Most of the time, the DTI should be no more than 36%.

Credit Score and Other Factors

The second thing they look at is how likely it is that you will repay your loan. This is determined by looking at your current credit score and your payment history. This will determine how risky you are as a borrower.

Next, they look at the value of the home that you want to buy. They will use information provided by a professional lender to determine how much the house is actually worth. All lenders have a maximum loan-to-value (LTV), which is usually between 80% and 95%. The higher the value of your home and the lower the amount you borrow, the lower the LTV percentage is.

Finally, the underwriter will look at whether you can make a down payment. If this is lower than 20% of the value of your home, it is likely that you will also have to pay for private mortgage insurance (PMI), which will increase the cost of your monthly payments on the mortgage itself.

“PMI is arranged by the lender and provided by private insurance companies. PMI is usually required when you have a conventional loan and make a down payment of less than 20 percent of the home’s purchase price. If you’re refinancing with a conventional loan and your equity is less than 20 percent of the value of your home, PMI is also usually required.”

Once the underwriter has collected all this information, they will review all the documents that you have provided. They will also look at your ability to pay for the closing costs of the mortgage itself. You may also have to demonstrate that you have at least two monthly mortgage payments, sometimes more, in reserve. This will prove that you can pay for your mortgage for a certain period of time in case of unforeseen events or other emergencies.

Clearly, getting approved for a mortgage is down to a lot of different things. Besides your debt, income, down payment, credit history, home value, and personal savings, you also have to meet the different guidelines put in place by the lender.