Bankruptcy and Mortgages: Are they Mutually Exclusive?
Bankruptcy is at an all time high and continues to grow. We are regularly faced with clients that have had a major credit issue in their past, such as a bankruptcy. As a result they have been told that they will not be able to purchase a home for 7 to 10 years. This is one of the most common myths about mortgage financing that exists as it relates to credit issues. A bankruptcy will stay on your credit report for 10 years, but it does not take that long for you to get a competitive mortgage. The truth is that bankruptcies happen for many different reasons. Many of them are no fault of your own: divorce, job layoff, illness, work related injury and many others. They also happen to people in all walks of life. It does not discriminate between wealth and poverty.
If you have had a bankruptcy due to an extenuating circumstance, I have some great news! Having a bankruptcy or other credit issue does not necessarily mean that you will have to wait “forever” to purchase a home. It also does not mean that you will get stuck paying a premium interest rate. In fact there are 2 primary types of bankruptcies and lenders treat each differently:
Chapter 7 Complete discharge of debts-You may be eligible for a mortgage 2 years from the date of discharge. HOWEVER, if the bankruptcy was due to a situation beyond your control and you have re-established good credit, you may be eligible after only 1year from the date of discharge.
Chapter 13: Repayment of debts to creditors under a payment plan-You may be eligible for a mortgage after making 12 on-time payments to the trustee.
As a side note, it is important to know that most lenders consider Consumer Credit Counseling (where the “Counseling” company re-negotiates a client’s outstanding debts and makes payments on your behalf) as the equivalent of a Chapter 13 bankruptcy. The reason for that is when you compare them, the biggest difference is that one uses a trustee of the court and the other uses a “non-profit” entity as the conduit for payments.
Furthermore, many people believe that as a result of the bankruptcy, they will be required to put a significant amount of money down in order to purchase the home. Again, this is not true. Under certain circumstances, it is very realistic to purchase a home with no money or very little money down.
Under the bankruptcy programs above, it is possible to get into a competitive 30 yr fixed rate mortgage. Even if you do not fit into one of the scenarios listed above, there are still many loan programs that will allow borrowers to purchase a home at reasonable rates, provide the means to take advantage of the current real estate market without having to wait and that will help you to begin rebuilding your credit history all at the same time.
Keep in mind that to a lender, the most important thing is that there is a high probability that we will get paid in full for the loan. Lenders are not in the business of building portfolios of foreclosed properties, and as a result, we want to make sure that a credit issue of this magnitude was a one-time occurrence, is behind you and will not happen again.
In summary, there is great hope for those who have had a bankruptcy or other credit issue! If you can relate to the scenarios described herein and would like to take advantage of today’s incredible real estate market, I would encourage you to take that first step and contact a mortgage professional that you trust, and get pre approved. There are still many great opportunities that exist in Orlando. Don’t miss out because of the myths.
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