Specialized Financing
Bankruptcy

The Minefield of Mortgage Financing After Bankruptcy

When a person declares bankruptcy the Office of the Superintendent of Bankruptcy notifies the credit bureau. This information stays on your credit bureau report for 6 - 7 years. You can start to re-establish your credit by doing the following:

•    Talk to your banker and say you want to re-establish your credit rating;

•    Open a savings account;

•    Be a regular and persistent saver.  Use the common techniques I am sure you have heard of: 

1. Pay yourself first; 
2.  Take your next raise and save it;
3. Save 5 % of your pay; 
4. Have your savings come right off your pay and into a separate savings account; 

•    Take out a small loan using the savings account as collateral, and then pay it back;

•    Apply for a secured credit card. Using a secured credit card is a quick way to rebuild your credit rating.  As you make regular payments your credit history looks better and better;

•    Pay your credit card balances on time.

 
Understanding mortgage financing is tricky at the best of times and certainly becomes more difficult after you have declared bankruptcy.  The best way to navigate through the minefield is to understand how mortgage lenders think and what they look for.  All institutions that lend money are primarily worried about one thing… risk… and will they be paid back the money.  In their eyes a person who has been previously bankrupt poses a higher risk than a person who has not.  This does not mean that you cannot obtain a mortgage after bankruptcy, but there are some things that need to be done and some pitfalls you should not fall into.

Most lenders have become nervous and will only consider financing after you have been discharged for 18 to 24 months.

Equifax and Trans Union credit bureau reports are of great importance to a lender and that is one of the first things they look at.  What is your credit score and what does your past credit history look like?  A bankruptcy will stay on your credit bureau for 7 years. A second bankruptcy will trigger the 1st one to show on your Trans Union credit bureau even though the first bankruptcy was over 7 years old.  Lenders will not consider mortgage financing if a double bankruptcy situation shows on the credit bureau report.  In the case of a double bankruptcy, the most recent one would have to be over 7 years old for a lender to agree to financing.

After discharge from bankruptcy you should check your credit bureau report to ensure that all items included in the bankruptcy show this way on your report.  Some institutions do not report correctly and this can give you an artificially low score and could potentially prevent you from obtaining credit of any kind or paying a higher interest rate than you need to.  A copy of your credit bureau report can be acquired for free from Equifax.  If there are some errors, you can show your bankruptcy papers to Equifax and they will make the corrections for you.  Once this is done it usually takes about 3 months for your score to improve.

Some credit needs to be established after bankruptcy.  This can be accomplished by obtaining a secured visa, an auto lease, an auto loan, etc.  Most lenders like to see two credit items that have been reporting for 12 - 24 months.  It is vital that you never make a late payment after the bankruptcy.

We see a situation quite often with couples where only one has some credit showing on their bureau report, for example, a car lease.  An easy way to establish credit for the other is to make the lease joint.  This will start reporting on both credit bureau reports without having to increase the amount of credit.

In order to be considered for mortgage financing 18 months after discharge some credit will have to be re-established or existing, and reporting (with no late payments) for 12 - 24 months.  Also a minimum down payment of 10 – 25% will be required.  Once you have been discharged for a year with re-established credit, the down payment may only be 5 – 10%. 

If you have had a mortgage foreclosure included in your bankruptcy and this shows on your credit bureau report, you will have to wait 7 years for this to disappear from the report.  The other trouble area is student loans.  You cannot include a student loan in a bankruptcy.  If a student loan goes to collection, a lender will want the collection paid in full prior to agreeing to financing.  This would obviously be a very difficult thing for most people to do.  It is therefore important to maintain student loan payments.

There is the possibility of getting a mortgage after you have been discharged from bankruptcy, but the best way to get to that goal is to think like a mortgage lender and understand what to do and probably more important… what not to do.