Taking on a mortgage is probably the biggest financial commitment you are going to make, so getting it right first time is incredibly important, especially if you are looking for a mortgage after bankruptcy. It is not only a case of choosing the right mortgage product to suit your personal circumstances, it is also imperative you make sure that you choose the right repayment option too. There are two main options offered to borrowers, both of which have their own merits and downfalls.
The traditional type of mortgage is known as a repayment mortgage, and your monthly payment goes towards not only the interest on your mortgage, but also towards repaying the capital sum borrowed. This type of mortgage is preferable to most people as it means that at the end of the mortgage term the entire amount borrowed will be paid off, and there will be no lump sum to clear or re-borrow. While you will always be paying a small amount towards the capital borrowed, for the first few years of a repayment mortgage, the majority of your monthly payment will be going towards paying the interest that is charged to your account. Typically the first ten to twelve years of a repayment mortgage are more interest than capital, in fact it is only around year twelve that more than 50% of your monthly payment amount will be going towards repaying the capital.
The second type of mortgage is an interest only mortgage, and the monthly payments on this will be going purely towards the interest, with no amount being paid off the capital sum borrowed. This method does dramatically reduce the monthly payments that need to be made, however the downside to this is that the capital sum borrowed is staying the same month in month out. This means that at the end of the mortgage term, the amount your initially borrowed is still owing, and unless you know you are going to come into a lump sum of money that will allow you to repay this amount in full, then taking an interest only mortgage can be a risky option. However, many lenders realise that the first few months of home ownership can be an expensive time, and for this reason it is not uncommon to find that they offer interest only payments for a limited amount of time, for example three or six months, meaning you have a little extra free cash to help with things such as furnishing or re-decorating your new home.
There is no right or wrong type of mortgage, and the way you choose to handle your mortgage repayments is purely your choice and should be suited to your current circumstances. The most important factor when choosing your repayment type, particularly when taking out a mortgage after bankruptcy is to be sure you can afford to make them every month.
When it comes to choosing a mortgage after bankruptcy, there is no reason why you should not approach it in the same manner that someone who has not been through bankruptcy would. Taking this kind of approach may be time consuming, but it will ensure that you get the best deal for your circumstances and that you won’t make a hasty decision that you may regret a couple of years down the line. Getting a mortgage after bankruptcy is a big financial commitment so you want to make sure you make the right commitment from the start.
One mistake that many people make when they are looking for a mortgage is they ring round banks asking what rates they are currently offering on their mortgages. This is all very well and good, but it doesn’t take into account your personal circumstances, and especially for those with adverse credit history, this approach is not going to be of any use. You want to find a lender that can provide you with a mortgage product that is suited specifically to your current and future needs. It is all too easy to look at a few different mortgage products and choose the one with the lowest introductory interest rate or the lowest monthly payments, not taking into account how these rates and payments are going to rise at the end of any introductory period.
There are some key aspects to mortgages that are worth spending that little bit extra time researching to ensure you fully understand the product you are being offered. Here are just a few of these:
- What percentage of the purchase price is the lender prepared to lend you – this is sometimes referred to as the Loan To Value ratio or LTV ratio;
- What is the maximum repayment term the lender will offer you;
- Are you allowed to make over-payments, if so are there any caps on these;
- Is there the option to take a payment holiday if you wish to do so;
- Does the lender offer interest only repayments;
- How often is interest charged to your account;
- Are there any other product discount incentives should you take a mortgage with them, such as home insurance or car insurance;
- Do early redemption penalties apply should you wish to pay off you mortgage early?
While this is by no means an exhaustive list, it does give you some idea of the kind of things you should be asking about along with interest rates and monthly payment amounts. As you will see there are many different elements that make up a mortgage product, and it is only when you can see all these elements that you can really compare lenders accurately. Just because you are applying for a mortgage after bankruptcy doesn’t mean you can’t be choosy about your mortgage product, you may not have as much choice as someone approaching mainstream lenders, but you will still be able to choose from a few products.
While declaring yourself bankrupt is a very serious course of action to take, and one that should never been seen as the “easy way out” of a bad financial situation, in some circumstances it is the best or only course of action to take. Once you have gone through the process of bankruptcy you will probably see your finances in a whole new light, and getting credit will be much harder than before, however it is not the end of the road as far as credit is concerned, and if you are considering getting a mortgage after bankruptcy then you will find there are some lenders who are willing to help.
You can only start the application process once your bankruptcy has been discharged by the court, so while you can look around at various brokers and lenders before this, there is no point in applying until afer your bankruptcy discharge date. Lenders will look at various elements of your circumstances in order to decide whether you take you on as a creditor.
Depending on your circumstances, there will be many different types of offer available to you, some of which are outlined here. Of course these are purely rough guidelines of the kind of offer you might receive.
It is possible to get a mortgage offer the day after your bankruptcy is discharged and filed at the court as being so. If you have at least a 15% deposit along with any associated closing costs, then you may will find a lender that will take you on, however you will more than likely need to go through a specialist broker who will have access to lenders that will.
If you have filed for a chapter 13 bankruptcy, then you can in fact refinance before your discharge date as it is on a payment plan for 3-5 years of the bankruptcy date. In fact it is sometimes possible to get a mortgage after bankruptcy as little as a year after filling when it comes to chapter 13 bankruptcies, which means if you have equity in your home you can also pay off your chapter 13 in the process. It is possible to get 100% financing on a home with chapter 13 bankruptcy, but this is all dependent on your income, credit score and trustee rating.
Waiting two years following your bankruptcy discharge date is of course the almost guaranteed way to secure a mortgage after bankruptcy as you will be able to not only build up a good credit score and payment history, but this is also deemed an acceptable amount of time by most mainstream lenders.
POSTED BY Admin ON June 11th, 2010.
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