How long after bankruptcy can I apply for a mortgage?

By Sabrina Karl

Bankruptcy is a serious financial event that can leave you feeling its impacts for years after filing. But that doesn’t mean you can’t ever apply for a mortgage again. You just have to understand what timing is realistic, and what smart moves to make while you wait.

The first thing to know is that there will be a waiting period, starting at your bankruptcy’s discharge or dismissal date, not the filing date. But the length of that period varies according to whether you filed for Chapter 7, 11, or 13 bankruptcy, and what type of mortgage you’re considering.

Depending on your situation, you’ll need to wait at least one year, and usually two, but perhaps 3-4 years. If you’ve filed more than one bankruptcy, or have also undergone a home foreclosure, the period may be extended up to seven years.

Fortunately for some, if your bankruptcy involved extenuating circumstances, like a one-time income hit from job loss, divorce, or medical bills, you may be able to shorten your wait.

But even after the period concludes, the mortgages you’ll qualify for may not have very favorable rates. That’s why it’s important to play it smart during your waiting period.

First, you’ll want to build up your credit history, establishing an on-time payment track record for at least 12 months and not using your full credit limit (aim for using less than 30 percent).

Second, save as much for a down payment as possible. The more funds you can put down on a new house after bankruptcy, the better the mortgage deal you’ll be able to secure.

Bankruptcy can certainly complicate or delay securing a new mortgage. But focusing on your credit score and down payment savings while you wait for the green light is your best path toward a new home.

Should I consider a balloon mortgage?

By Sabrina Karl

Virtually every mortgage shopper has the same goal: find the best loan for your money. With the most obvious measure being the interest rate, it’s no surprise that the low APRs and reduced monthly payments of a balloon mortgage can be tempting. But, buyer beware.

Like adjustable rate mortgages, or ARMs, balloon mortgages offer fixed payments for a set term, often five to seven years. But whereas an ARM continues after shifting into an adjustable-rate period, balloon mortgages terminate with the borrower on the hook to repay or refinance the remaining balance. The large size of this balance is the “balloon payment” that gives the loan its name.

Balloon mortgages can make sense for anyone certain they’ll sell their home within the 5- or 7-year loan period, since the sale proceeds can pay off the loan balance. But without that certainty, there are significant risks to balloon mortgages.

First, you may not be able to sell your home for the price or timing you need. You could have difficulty finding a buyer, or decreased home values may mean your sale price won’t cover the balloon payment.

Second, you may encounter trouble refinancing. Again, dropping home values could prevent a lender from offering you a sufficient loan. But credit changes also pose a risk. If your credit score drops substantially, it may be hard or even impossible to refinance.

In either case, if you can’t come up with the balloon payment, you could face foreclosure. Some lenders may try to help you move into another loan to avoid this, but there are no guarantees or requirements that they do so.

The initial savings of a balloon mortgage may be worth the risk in a small number of scenarios. But for the majority of homebuyers, the gamble far outweighs the limited upside.

3 Things To Do Before Applying for a Mortgage

By Sabrina Karl

If you’re considering buying a new home, first ask yourself where you stand financially. How strong or shaky you are on three factors lenders care about — your credit score, cash on hand, and debt — will determine how favorable (or not) a mortgage you’ll be offered, or if you’re approved at all. So you may want to bolster these before applying.

Start by looking up your credit score, as well as that of anyone else who will be on the mortgage. Unless you’re already above 760, boosting your score can land you better rate offers from lenders.

Raising your score can generally be done by making all of your payments on time, paying down debt, and not opening any new cards or loans shortly before applying for a mortgage.

Reducing debt is doubly important because it also lowers your debt-to-income ratio. Lenders use this calculation to compare your income to your total debt (including car loans, student loans, credit cards, and any other debt), and the lower your monthly debt obligation, the stronger your application.

Although paying off a loan or card entirely is great, any debt reduction will improve your ratio. Consolidating multiple debts into one lower monthly payment can also help.

The third critical lender consideration is how much cash you have. In addition to wanting to see you’ll have funds in reserve after making your down payment, they’ll also look at how much you had two months ago, not just today. So save as much money as you possibly can, and don’t rely on a large cash gift from a relative right before applying.

When aiming to maximize the size and rate of your new mortgage, fortifying your credit score and savings, while reducing your debt, are surefire ways to put your best application forward.

What’s the best day of the month to close on my mortgage?

By Sabrina Karl

You might have heard from a friend or even a mortgage professional that closing your home loan at the end of the month is your smartest move. While that can be sound advice, it’s not uniformly best.

The first thing to understand is that mortgage financing is like everything else: there’s no such thing as a free lunch. While the date you close will affect how much you outlay when, you’ll still pay interest on every day you have a mortgage, no matter your closing date.

Second, the rules are different for refinancing. Refinancers will owe interest to both their existing and new lender for all the days of the month. So the closing date makes little difference.

If you’re opening a new mortgage, closing late in the month reduces the prepaid interest you’ll need to pony up at closing. That’s because you’re required to prepay the interest that will accrue between closing and the end of that calendar month.

You’ll then get to skip a mortgage payment in the first post-closing month, since payments kick off on the 1st of the month following a 30-day period after closing.

But closing earlier in the month offers different advantages. True, you’ll need to bring more funds for prepaid interest to closing. But that will be offset by skipping the next two monthly payments instead of one.

Closing early in the month also keeps you out of month-end loan traffic jams, when the highest volume of mortgages are being processed — with some closings invariably getting delayed.

Ultimately, different closing dates won’t substantially impact on your ultimate mortgage costs. But whether you’re initiating a new mortgage or refinancing, or prioritizing minimal closing costs versus skipped payments, you can choose a closing date that offers the best advantages for your situation.

Is a home inspection required when buying a home?

By Sabrina Karl

Among the myriad steps of buying a new home is having a home inspection performed once you’re serious about purchasing a specific house. But as far as your lender is concerned, is a home inspection required?

Home inspections are certainly a smart move. Performed by certified professionals, the inspection will evaluate the existing condition of all aspects of a house, including the roof, foundation, electrical and plumbing systems, heating and cooling mechanicals, walls, windows, and insulation.

These inspections typically cost $300-$500 and result in a detailed report laying out the area-by-area findings throughout the house.

Typically, homebuyers order a home inspection after having their offer on a house accepted, giving them a chance to negotiate any price adjustments based on deficiencies or required repairs identified by the inspection, or to abandon the offer altogether.

As smart as it is to order an inspection, however, your lender almost certainly won’t require it. What mortgage lenders do require is an appraisal of the home, but this is not at all the same as a home inspection.

Whereas an inspection assesses the quality and condition of the home’s structure and its major systems, an appraisal aims merely to determine the home’s fair market value, so the bank can be sure the requested loan is appropriate given the value of the property.

One exception is for FHA loans, where the required appraisal also includes a basic inspection to determine that the home is safe and habitable. But the FHA inspection component comes nowhere near the comprehensiveness of a professional home inspection.

Gaining a complete understanding of a home’s physical strengths and weaknesses before you purchase it is invaluable. Just be clear that the inspection is an investment you make to protect your own interests — and peace of mind — rather than the lender’s.