A personal bankruptcy stands out as a conspicuous blemish on a consumer’s credit report for as long as 10 years. But the barrier it presents to obtaining a mortgage doesn’t have to last that long.
Many individuals who sought bankruptcy protection during the recent recession, which officially ended in 2009, may now be eligible to apply for a mortgage. The mandatory waiting periods to apply for a mortgage backed by Fannie Mae or the Federal Housing Administration last from two to four years.
“Right now, a lot of people are coming out of the hard times, after a bankruptcy or foreclosure, especially within this last year,” said Sean Young, a senior mortgage adviser with FirstCal Colorado, a direct lender in the Denver area. “We’re doing a lot more applications for people who lost their house, had to rent and rebuild their credit, and now are back in the market.”
Personal bankruptcy filings climbed steadily beginning in 2007 before peaking in 2010 at about 1.5 million filings, according to the American Bankruptcy Institute. Since then, bankruptcies have been on the decline, which the institute attributes to a corresponding drop in the level of delinquent debt subject to discharge through bankruptcy.
Households that went through a Chapter 7 liquidation bankruptcy must wait four years from the date of discharge (when their debts are wiped out) before applying for a conventional loan. The waiting period, according to Fannie Mae guidelines, is two years from discharge for Chapter 13 bankruptcies, in which debts are partially repaid under a court-approved plan.
The wait for a Federal Housing Administration loan is two years for Chapter 7, and one year for Chapter 13, provided the individual has kept up with payments under the reorganization plan and has permission from the court.
There are exceptions for those who can show extenuating circumstances, such as job loss, but “those don’t happen often,” Mr. Young said.
For borrowers who were able to hold onto their homes throughout a bankruptcy, it might now make sense to refinance, because of the low interest rates available, said Bill Banfield, the vice president of capital markets for Quicken Loans, an online lender. “They may have been excluded from the market for a period of time, and now rates are still in the low 4s,” Mr. Banfield said.
But John Ulzheimer, a credit expert at CreditSesame.com, which offers advice on managing credit, cautioned that “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,” be it for purchasing or refinancing. Borrowers who go through a bankruptcy usually come out the other side with a credit score in the low 500s, he said. The minimum credit score for consideration for a mortgage is usually around 620, but even then, the interest rate will not be very competitive, he added.
“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,” Mr. Ulzheimer said.
Bankruptcy survivors hoping to enter or return to the housing market should first establish a solid financial track record, said Mark S. Cherry, a bankruptcy lawyer in Cherry Hill, N.J. He said lenders want to see at least a two-year window of timely rent payments for applicants with a bankruptcy in their background.
People in this situation should think about whether they might be “truly better off renting,” Mr. Cherry said, especially given how difficult it can be to get a mortgage even without a bankruptcy.
Originally published here by the New York Times.