Bankruptcy and Mortgage
A lot of people may be under the impression that once they file bankruptcy, they will not be able to qualify for a mortgage for ten years. This is not so, but there are a few things that the buyer ought to know before looking for a new home.
Re-established credit: FHA lenders require that the borrower wait two years from the bankruptcy discharge date before they will approve a loan. Fannie Mae and Freddie Mac require four years. There are many lenders who will approve loans one day after the bankruptcy discharge date, but these loans come with a hefty interest rate, a fat pre-payment penalty and a significant down payment. Whatever the time frame, it is very important for the underwriting process that the borrower shows that he or she has made efforts to re-establish their credit. Banks are very interested in what you have done since the discharge of your bankruptcy. So, it is a good idea to get a couple of secured credit cards or loans and pay them on time each month to help re-establish credit.
Explanations: Very often, an underwriter will require a letter of explanation regarding the bankruptcy. The reason they ask for a written explanation is because they are interested in the circumstances that led the borrower to file bankruptcy in the first place. The underwriter is looking for a reason that can be considered an isolated incident. The underwriter may not feel comfortable approving the mortgage loan if the reason for bankruptcy given by the borrower is something like, “I like to shop.” However, everybody goes through hardships and low times and a strong explanation letter can sometimes mean the difference between a loan approval and a decline.
Save Money: Showing the capacity to save money is important for any loan approval, but it is especially important for borrowers who are recovering from a bankruptcy. So it is direly important that the borrower leans to live within or below their means, at least for a little while. This is so that they can begin to save money and build their assets again, which will go a long way to showing credit worthiness. Also, having a down payment will increase the borrower’s credit worthiness, so start saving!
Because of a bankruptcy, a borrower may find that they will have to jump through a few more “hoops” to qualify for a loan. However, the end result is always worth it. Homeownership is a great reward!
Here is a great book to read regarding bankruptcy and rebuilding credit
