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Bankruptcy and Interest Rates


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TERMINOLOGY

Filing for bankruptcy is a way to get a fresh start with your finances, but it will also leave some long-term scars on your credit. When it comes to applying for new loans, you can expect to pay much higher interest rates and face stricter requirements. Fortunately, over time you can qualify for better terms as you improve your credit score.

Mortgage Rates After Bankruptcy
A bankruptcy will stay on your credit report for ten years, but you can qualify for a new mortgage loan within 2 to 4 years after you file, depending on the lender and your credit score. You will, however, be subject to paying higher interest rates than someone without bankruptcy on his or her record. For example, if your FICO credit score is below 500, your interest rate might be as much as 6.5 percent higher than other borrowers. The gap narrows as your score increases, though, and if your score is as high as 600, you may only have to pay a rate that is roughly 1.5 percent higher than similar non-bankruptcy borrowers. The good news is that you can start building and improving your credit the day after your bankruptcy is complete.

How to Improve Your Chances of Good Rates
Immediately after your bankruptcy, apply for new credit. The most common method is to obtain a secured credit card. This allows you to charge up to a small limit, perhaps $500, as long as you have deposited the same amount with the credit issuer's bank. After demonstrating responsible spending behavior for a year, most companies will allow you to upgrade to an unsecured card with a higher limit. The main benefit, though, is that the year of timely repayments will improve your credit and qualify you for more reasonable mortgage rates.

You can also get better home loan interest rates after bankruptcy by providing a large down payment. The more money you put down, the lower the lender’s risk and the lower your rate will be. While a full 20 percent may be out of reach for many borrowers, contributing 10 to 15 percent can still make for much more appealing interest rates.

Even if you don’t get a great rate with your first loan, you can still enjoy the equity building benefits and interest tax deductions of homeownership until you can refinance into a better mortgage in the near future.