Buying A Home After Bankruptcy

Buying A Home After Bankruptcy

EVERY month tens of thousands of people file for federal bankruptcy protection, mostly to wipe out debts and start anew.

Many of these filers mistakenly think that it will be many years before they can obtain a mortgage or refinance an existing home loan, if they ever can — perhaps because notice of a bankruptcy filing typically stays on a credit report for 7 to 10 years. In reality, they could become eligible in as little as one year, as long as they work diligently to improve their financial picture.

Mortgages guaranteed by the Federal Housing Administration are permitted one year after a consumer exits a Chapter 13 bankruptcy reorganization, which requires a repayment plan that is often a fraction of what is owed, and two years after the more common Chapter 7 liquidation, which discharges most or all debts. Conventional mortgage guidelines from Fannie Mae and Freddie Mac, meanwhile, call for a wait of two to four years.

The most important point, is that consumers re-establish their credit and show that they can manage it responsibly. They can do this by paying rent and utility bills on time, or perhaps by obtaining a secured credit cards.

Mr. Feinstein says he has seen a few clients qualify for a mortgage only two years after filing for Chapter 7, though generally borrowers can obtain a loan quicker after a Chapter 13 reorganization, because of the partial repayment of debts, he said.

As Mr. Walsh noted, “Chapter 13 is a little more responsible” way to go from the lenders’ perspective, so lender guidelines are a bit more lenient.

Rebuilding credit after a personal bankruptcy will take some work. Mr. Feinstein suggests that individuals maintain or take out one or two credit cards and routinely use them. “If the payment’s due on the first, make sure it’s paid by the 25th” of the previous month, he said.

A personal bankruptcy filing will have a larger impact on a credit score than any other credit issue, according to a July report by VantageScore, which provides credit scores to lenders. Filing for bankruptcy protection will reduce a credit score by 200 to 350 or more points, it said, compared with a decline of 80 to 170 points for a foreclosure. VantageScore’s scores range from 501 to 990.

For the larger rival FICO, bankruptcy could cut a credit score by 130 to 240 points. 


Kim Guest Headshot
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Phone: 864-918-0066
Dated: August 21st 2013
Views: 273
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