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How will filing for bankruptcy affect mortgage interest rates?

Indebted consumers who one day hope to purchase their own homes are often resistant to fully exploring all of their options to get out of debt.

One of those options is to file for Chapter 7 bankruptcy protection from creditors. But while filing for Chapter 7 can get you out from underneath the weight of your debt mountain, it can definitely affect the interest rates you can expect to pay for major purchases like homes and cars.

Some lenders will refuse to grant mortgages to those who have recently filed for bankruptcy. Others will, but impose stricter requirements and higher interest rates.

Does that mean that you should avoid filing for bankruptcy even if appears to be your best option of getting out of debt cleanly? Certainly not.

Anyone who is contemplating a Chapter 7 bankruptcy filing is already standing on some shaky fiscal ground. This is likely not the optimum time for making any major purchases. Bankruptcies show up on the three major credit reports for a full decade, but most consumers will qualify for mortgages after a couple of years, or four at the most.

Additionally, each month that you meet your financial obligations, your credit score will inch upward. Eventually you will qualify for lower interest rates on loans.

Here’s an example of the way the process unfolds. A consumer files bankruptcy and their FICO credit score drops below 500. He or she could expect to pay up to 6.5 percent more than borrowers without a bankruptcy on their records and who have higher credit ratings.

But once that score rises to 600, the borrower’s rate may only be a little over a percent higher than those who have never filed for bankruptcy. As long as you develop good fiscal habits after your bankruptcy has been discharged, you will see lenders once again extending credit and offering decent mortgage rates to you.

Source: Mortgage 101, “Bankruptcy and Interest Rates,” accessed June 23, 2017

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