Mortgage Options for Former Debtors

In the past, traditional mortgage lenders
automatically rejected people who had declared personal bankruptcy. Many
potential homebuyers felt they must wait at least seven to 10 years
after a bankruptcy to be eligible to become homeowners. Most financial
and legal professionals (including many loan officers) will state
emphatically that there is a two-year waiting period from the discharge
date of a chapter 7 bankruptcy and at least a one-year wait after the
discharge of a chapter 13. This is a common misconception.

</p><p>Though bankruptcy is certainly a major blemish on a credit report, it
does <br>not necessarily disqualify a borrower. Recognizing that
sometimes bad things happen to good people, some mortgage companies are
becoming more willing to take a calculated risk. Some of the newest,
most aggressive loan programs can even offer up to 100 percent financing
just one day after the discharge of a chapter 7 bankruptcy.

</p><h4>Hand Underwriting</h4>

<p>Most lenders currently use Fair Isaac's FICO scoring system to
determine whether potential buyers are a worthwhile risk. Unfortunately,
bankruptcy automatically gives a low score, regardless of the events
leading up to it. A few select loan programs look beyond the scores and
look at the individual's overall credit record. Hand underwriting, as
it's called, allows a lender the chance to underwrite a loan on it's
overall merit rather than just blindly accepting a flawed credit score.
"Extenuating circumstances" can be taken into account, and loans can be
made.

</p><p>The documentation of extenuating circumstances gives an underwriter
greater freedom in his or her decision-making process. In most loan
programs, there are differences between the <i>guidelines</i> and the
<i>rules.</i> Generally, the <i>rule</i> allows for shorter waiting
periods after a bankruptcy than the guideline. For example, FHA
guidelines stipulate that in general, a borrower must wait two years
after a chapter 7 bankruptcy before they qualify for FHA financing (HUD
4155.1 Ch. 1 Sec.1 2-3 E). The rule is that an underwriter may approve a
borrower for a loan at not less than one year as long as the bankruptcy
was due to extenuating circumstances out of the borrower's control and
there are sufficient compensating factors such as cash reserves or time
on the job or at their current residence (to name a few) documented in
the file to warrant the exception. It is the loan officer's job to make
sure that the loan is packaged in such a way as to keep the waiting
period to the shortest time period as possible as long as it is in the
interest of the client to do so.

</p><blockquote><blockquote>
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<big><i><center>
If a buyer cannot get approved, there are customized plans that can
re-establish credit to help the buyer become "mortgage ready," ensuring
home ownership in the future.
</center></i></big>

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<p>Extenuating circumstances that a loan underwriter may consider are
events such as prolonged, catastrophic illness, an accident that either
permanently or even temporarily disabled the family breadwinner,
prolonged job loss out of the borrower's control and business failure
not resulting from the owner's financial mismanagement.

</p><p>It is interesting to note that divorce is not considered a reason in
and of itself worthy of an underwriting exception. However, events that
are caused by the divorce may indeed warrant exception to the rules. A
common example is when at the time of divorce all debts are split
between the spouses, each taking responsibility for their share. At some
point, one spouse stops making payments to creditors and either defaults
or declares bankruptcy, leaving the responsible spouse to pay <i>all</i>
of the bills. Often, this is accompanied by a default in child support
at the same time, leaving the ex-spouse with more debt and less income,
forcing no choice but bankruptcy.

</p><h4>Misconceptions</h4>

<p>A common misconception is that a previous bankruptcy on your credit
report will require you to have a large down payment and pay extremely
high interest rates and points. Actually, there are programs that allow
as little as 3 percent down and even some that require no down payment
at all, with very attractive rates and fees. FHA, Federal VA and the
newer Emerging Markets program are examples of loan programs that have
very attractive rates, low or no down payments and are very favorable to
borrowers that have had a personal bankruptcy. In each of these
programs, underwriting exceptions can be made to allow persons a new
home loan in as little as one year out of a chapter 7, and in the case
of FHA, you can actually still be in a chapter 13 and get a home loan
with your trustee's permission (HUD 4155.1 Ch. 1 Sec.1 2-3 E).

</p><h4>Aggressive Options</h4>

<p>The sub-prime lending market has become increasingly competitive in
rates and fees and responsive to the needs of the consumer. Even if a
person doesn't qualify for one of the above programs, he or she may
still qualify for a great home loan with little or no down payment. The
downsides to these programs are typically a two- to three-year
prepayment penalty and higher rates and fees. Many companies now have no
waiting period after a bankruptcy and are willing to offer 100 percent
financing immediately after the discharge of a personal bankruptcy.

</p><p>A few of the most aggressive lenders will even lend up to 100 percent
of the value of a home only one day out of foreclosure. These loans are
very credit score-driven, and due to the high rates of errors on a
credit report after a personal bankruptcy (approximately 98.2 percent),
they can be difficult to qualify borrowers for at times. The middle
score of all three bureaus is used and typically will need to be over
600 for a borrower to qualify. This condition may slow the home-buying
process down for post-bankruptcy borrowers, but can usually be solved
with a good letter-writing campaign and personal follow-up from the
borrower to update all of the accounts on the credit report reporting in
error.

</p><p>It should be noted that a borrower with less than a 600 credit score
is not disqualified, but would not typically qualify for 100 percent
financing. Middle credit scores as low as 500 are acceptable to most
sub-prime lenders and would simply be approved at a lower loan to value.
These lenders also tend to be more lenient on the source and seasoning
of funds to close than a traditional conforming or government loan would
be, making it easier to come up with a down payment. Often, a down
payment can come from virtually any source as long as the money itself
is drawn from the borrower's bank account for closing.

</p><h4>Becoming "Mortgage-ready"</h4>

<p>No matter what the situation, select mortgage professionals who have
a program that will work for the buyer with a bankruptcy history. If a
buyer cannot get approved, there are customized plans that can
re-establish credit to help the buyer become "mortgage-ready" in the
future. It is important for a borrower to work with a knowledgable
professional who has experience in working with those who have been
through a bankruptcy.

</p><p>Bankruptcy no longer needs to stand in the way of home ownership.
With the help of more creative lenders, those who have experienced
difficulty will have an easier time getting a mortgage. Clients should
be made aware of these programs as early in the rebuilding process as
possible. "Mortgage-ready" programs can serve as a valuable tool to help
borrowers get back on their financial feet and start becoming productive
members of society as quickly as possible.