My credit score is recovering after a bankruptcy — how can I get a mortgage?

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The Credible Money Coach helps a reader understand how a bankruptcy and fair credit score may affect his ability to get a mortgage. (Credible)

Dear Credible Money Coach,

I have a bankruptcy on my record, but my credit score is moving up. It’s now 650. What should I do to be able to get a home loan, if that's even possible? — Don

Hello, Don. Rebuilding your credit after bankruptcy is no easy task, and I applaud your progress! A 650 credit score is a fair score by FICO standards, so while your score may not yet be where you’d like it to be, it’s far from the worst it could be.

It is possible to get a mortgage after a bankruptcy, and it’s possible to get a mortgage with a fair credit score. Even though those factors together may make it more difficult, it’s still possible to get a mortgage when your low, but rising, credit score is due to bankruptcy. The caveat, though, is that the lower your score and the poorer your credit history, the more probable it is that you’ll get offered a mortgage interest rate that’s higher than you’d like.

Here are some ways you can get the best possible mortgage deal.

Option 1: Give yourself more time

When it comes to negative information on your credit reports, time is the best healer. You didn’t say when your bankruptcy occurred, but it typically remains on your credit report for up to 10 years, depending on the type of bankruptcy.

If you’re able to wait until the bankruptcy drops off your credit reports and work to improve your scores, you may have an easier time securing a mortgage and doing so at a favorable interest rate.

Option 2: Work on your credit scores now

If it’ll take years for the bankruptcy to fall off your credit reports, or you feel strongly that now is the right time to buy a house, your next best option is to spend a few months improving your credit scores as much as possible.

Actions that improve credit include:

Paying your bills on time every month, as agreed with the creditor.
Getting current on any past-due accounts.
Pay down credit card balances.
Opening a secured credit card to broaden your mix of credit accounts and build a positive payment history.

It’s important to understand that while these actions help, you can’t build excellent credit scores overnight.

Option 3: Look for a mortgage for fair credit

You can shop for a mortgage while building your credit. However, boosting your scores first will make it easier. Certain types of home loans have lower credit score requirements than conventional mortgages. Here are three that you might consider:

FHA loans — The Federal Housing Administration insures these mortgages, which private lenders make. It’s possible to qualify for an FHA loan with a credit score as low as 500 (although you’d have to make a down payment of at least 10%).
USDA loans — If you have a low income and want to buy a home in certain rural areas, you may be able to qualify for a USDA loan. These loans have no minimum credit score requirement.
VA loans — If you or your spouse are veterans or active-duty service members, you may be eligible for a VA loan, which also has no minimum credit score requirement.

Keep in mind that while you may be able to qualify for a federally backed loan, your fair credit score and past bankruptcy may mean that you’ll get a higher interest rate or less favorable terms than you would with a higher score and clean credit history.

A final word ...

Although interest rates are rising, today’s low rates make it an excellent time to buy a home. But if your credit scores and bankruptcy make it challenging to qualify for a mortgage at a good rate, it may not be the right time to get a mortgage.

And it’s important to remember that bankruptcy only clears up your debt (all or some of it), it doesn’t necessarily resolve the underlying circumstances. If you’re still having financial problems, getting a mortgage will likely make your situation worse.

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About the author: Laura Adams is a personal finance and small business expert, award-winning author, and host of Money Girl, a top-rated weekly audio podcast and blog. She’s frequently quoted in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her speaking, spokesperson, and advocacy work. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.