Bankruptcy

A bankruptcy filing delivers a devastating blow to your credit and FICO score, but it doesn’t mean you have to wait 10 years before you can qualify for a mortgage, but it does stay on your credit for 7 to 10 years.  Many consumers who have filed for Chapter 13 bankruptcy have been able to obtain a mortgage while they are still in bankruptcy if they have made at least one year of payments to the Trustee, and the Trustee will determine if it can be approve the new home purchase.  For those who have filed Chapter 7 bankruptcy, they will have a waiting period of anywhere from 2 years to 4 years, depending on the loan program.  The good news is that once the bankruptcy has been discharged, your credit score will be better than it was before the filing, and you can begin to start building your credit and scores again. 

There are now programs available that will allow a person to purchase a home one day out of a bankruptcy, foreclosure, or short sale.  You will be required to have at least a down payment of 20% to 25% of the purchase price, and the interest rate will be about double, or more, whatever the going rate is for conventional loans. 

Mortgage lenders are interested in your recovery — what you’ve done since your bankruptcy filing.  It won’t happen over night, but here are some tips and things to keep in mind when you inquire about a mortgage with a tarnished credit past:

Give explanations. No mortgage lender is going to ignore the fact that you’ve filed bankruptcy and he or she will likely want to know the cause of the filing.  Your lender will be particularly interested in whether the same situation could happen again.  Your chances of being qualified are much better if your bankruptcy was caused by a single event such as a loss of employment or a death in the family, rather than if it was the result of “just spending too much.” 

If the bankruptcy resulted from a single event, it is important to show your lender paperwork describing the incident, such as the layoff notice, doctor and hospital bills, or death certificate.  You will also be asked to submit the initial court documents to indicate when the bankruptcy was filed and what items were listed, along with a copy of the Discharge of Debtors, signed by the Judge.

Demonstrate good money habits now. Many people who file bankruptcy swear off credit altogether, however, it is important to re-establish your credit rating. Get several secured credit cards and take on some sort of loan — furniture, a car, or a major appliance — to demonstrate that you are able to make timely payments.  Make sure you are making other payments (utility bills, cell phone, etc.) on time as well.  Your credit score will improve quickly over time.  Use the credit card for one tank of gas a month (and that's it) to show you use it, but pay it off each month. 

Dispute any credit report errors. There’s no need to add to your troubled credit history with errors on your credit report.  Get a copy of your credit report from each of the three major credit reporting agencies: Equifax, http://www.equifax.com; Experian, http://www.experian.com; and TransUnion, http://www.tuc.com. If you encounter any errors, inform the credit reporting agency and the creditor, in writing, and send documentation from your bankruptcy paperwork (List of Debtors), as to what information you believe to be inaccurate and request deletion or correction.  Make sure you check all three reporting agencies and creditors for errors, and notify all of them.

Save your money.  Lenders may be more willing to loan you money if you’ve saved up a considerable amount of money for a down payment.

Live within your means. Even subprime lenders won’t risk loaning you money for an opulent oceanfront mansion. Think small when the time comes to look for a home. Smaller homes often mean smaller mortgages.

Foreclosure or Short Sale

Once foreclosure has been completed, it takes 2 to 7 years to be eligible for a mortgage, depending on the loan program.

After the short sale is complete, it takes 2 to 4 years to be eligible for a mortgage, depending on the loan program. 

Again, there are programs that will allow you to buy a home 1 day out of foreclosure or short sale.  So all hope is not lost, it depends on what you have for a down payment, and what type of payment you will have. 

If you have any further questions, please email or call me!  Sherry@SherryBitner.com or 941-504-1445.

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