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Mortgage Loans After Bankruptcy

Mortgage Loans After Bankruptcy

Availing mortgage loans after bankruptcy is contingent on the borrower having built good credit scores following a bankruptcy discharge.
Aparna Iyer
Filing bankruptcy is a consequence of the debtor being unable to discharge debt obligations. The eligible consumer/debtor has the option of filing a Chapter 7 or a Chapter 13 bankruptcy. The former is preferred, since it absolves the petitioner of discharging debt obligations that cannot be repaid. The latter, on the other hand, results in the consumer having to discharge his/her dues within a period of 5 years.

The Loans

The desire to buy a home after a few years of bankruptcy discharge is but natural. However, one must remember that credit scores may take a hit of as much as 350 points as a consequence of the filing. Again, this information stays on record for 7 years and 10 years as a result of filing Chapter 13 and Chapter 7 respectively. Poor credit scores and adverse credit history is unlikely to make one the ideal candidate for availing mortgage loans. Hence, the first step towards easy procurement would be to ensure that one builds his/her credit score.

The easiest way to build one's credit score and establish credit worthiness would be to obtain secured credit cards. A secured credit card is collateralized by a cash deposit of $500 or so, which functions as the credit line for the account. In other words, people can only charge the amount that is available in their account. Consumers who refrain from maxing out their credit cards will be able to build their credit scores gradually. For better results, it's advisable to charge less than 30% of the credit limit. In time, the credit card company may reward the customer by extending an additional line of credit without requesting further cash deposits.

Obtaining a non-revolving line of credit like a mortgage loan after bankruptcy, availing a second mortgage, refinancing mortgage, obtaining a car loan, and making regular monthly payments can help the consumer build his/her credit scores. However, there is a catch. Unlike secured credit cards, these loans are not easy to come by.

The Lenders

People interested in getting a mortgage can do so, provided they have worked towards building their credit score and credit history following bankruptcy proceedings. Generally, most lenders refuse to extend a mortgage prior to 4 years from the date of filing bankruptcy. Moreover, they would expect the homeowner to purchase private mortgage insurance on account of increased risk of default. However, there are a few options for the aspiring homeowner.

The Mortgage Plans

People desirous of availing a home mortgage in such conditions may find it easier to obtain FHA (Federal Housing Administration) insured loans, provided they have a fairly decent credit score, and the debt-to-income ratio is as per the specified guidelines. This ratio indicates the ability of the borrower to discharge debt obligations and a lower ratio is a favorable indicator. The aspiring homeowner is expected to have made on-time payments on all accounts for 12 consecutive months and 24 consecutive months from the date of filing Chapter 13 and Chapter 7 bankruptcy respectively.

Eligible veterans can qualify for a VA (Veterans Administration) insured loan after 2 years of the filing. In case the petitioner/consumer filed bankruptcy due to compelling circumstances, the consumer may be eligible to obtain a mortgage loan assuming that the discharge was obtained at least a year from the date of applying for the loan, and since then the petitioner has been successful in rebuilding his/her credit scores.

Refinancing

People who filed Chapter 13 bankruptcy may be able to retain their home. Moreover, they may be interested in refinancing their mortgage to a lower and more favorable interest rate. Again, an FHA insured mortgage can be used to refinance the adjustable rate mortgage loan to a fixed rate of interest, provided the borrower satisfies the aforementioned conditions. One needs to bear in mind that mortgage history is very important for obtaining such a loan.

Second Mortgage Post Bankruptcy

Sometimes people try to obtain a second mortgage, viz., a home equity loan or a home equity line of credit with the intention of using the proceeds to pay off Chapter 13 obligations. However, it's difficult to find lenders who are willing to provide it.

While these loans are possible, it may be prudent to wait for a few years before undertaking another financial obligation, since the inability to meet one's financial commitments forced one to file bankruptcy. The focus, at first, should be on building credit scores and managing finances with an iron hand.