What a Mortgage Looks Like After Bankruptcy

Many who find themselves in the unfortunate situation of a personal bankruptcy fear the worst when it comes to obtaining a mortgage somewhere down the line. While a bankruptcy may tarnish a credit report for up to 10 years, a recent article in the New York Times suggests that it may not be the case for a mortgage.

In the case of the recent recession, officially ending in 2009, it now seems that the mandatory waiting periods to apply for a mortgage (via Fannie Mae or the Federal Housing Administration) for those who sought bankruptcy during those times now only last from 2-4 years.

According to Sean Young, a senior mortgage advisor with FirstCal Coloardo, a lot more applications are being processed for those who originally lost their home, had to rent and rebuild credit, and are now back in the market.

In 2007, personal bankruptcy filings climbed steadily through 2010 when they peaked at 1.5 million fillings (American Bankruptcy Institute). Since then, they have fortunately been on the decline.

At present, households that went through a Chapter 7 liquidation bankruptcy during that time must wait 4 years from the date of discharge (when debts are wiped out) before applying for a loan.

Chapter 13 bankruptcies where debts are partially repaid under a court approved plan has a 2 year waiting period, according to Fannie Mae guidelines. Federal Housing Administration loan waits are 2 years for Chapter 7, and 1 year for Chapter 13, if the individual has both kept up with payments under the reorganization plan.

For borrowers who were able to hold on to their homes during a bankruptcy, now may be a good time to re-finance, according to Quicken Loans vice president Bill Banfield: "They may have been excluded from the market for a period of time, and now rates are still in the low 4s."

However, CreditSeasame.com credit expert John Ulzheimer issues caution, for "just because the rules say that you can apply after 24 months, that doesn’t necessarily mean it’s a smart financial move to apply" for both purchasing or refinancing. "“If you want to get your scores high enough to where you can get a truly competitive rate, then you’re looking at five years to even get it to 680, assuming you’re not missing payments or going into default again."

Still, the options are beginning to emerge for those recovering from bankruptcies. If you're wondering what your options are, don't hesitate to send us an email or give us a call and we will connect you with someone who can help.

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