Board Topic: Home loan after bankruptcy
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Home loan after bankruptcy

Posted by: Jay Jul 18 2003, 03:44 PM
I would like to purchase a home and have a question about a loan. I filed for Chapter 11 bankruptcy just over 4 years ago. Since that time I have maintained my existing credit and have been able to obtain other sources of unsecured credit in my effort to "rebuild" my rating. Level of income is sufficient and my current debt is very little. What are my chances of securing a low rate mortgage at this time? Should I wait longer?

Posted by: loanuniverse Jul 18 2003, 06:56 PM
Before you read any further, let me make clear that I am not a residential mortgage lender. In fact, my background in consumer lending is very limited. Having said that, your question intrigued me since I wanted to know what kind of guidelines are in place for someone with a bankruptcy in their record to get a mortgage loan.

So I went to Freddie Mac, which is the Government sponsored company that purchases mortgage loans in the secondary market. There, I found a Pdf file with their training guide for the users of their loan generating software.

The following is from that document:

Documentation Requirements for Bankruptcy

Except for Accept and A-minus mortgages, a bankruptcy, mortgage foreclosure or deed in-lieu of foreclosure within the last 7 years must always be considered significant.

The length of time since discharge of the bankruptcy (or recordation of foreclosure or deed-in-lieu) to the date of mortgage application must meet the recovery period requirements for extenuating circumstances or financial mismanagement, as applicable, or the mortgage should be considered ineligible for sale to Freddie Mac.

If the transaction received a Caution credit risk class and any borrower had a bankruptcy within the last 7 years, the file must contain the following:

Copies of the bankruptcy petition, schedule of debts, and discharge

Evidence to indicate all debts not satisfied by the bankruptcy have been paid or  Any other evidence necessary to support the borrower has re-established and
maintained an acceptable credit reputation.

Documentation Requirements for Financial Mismanagement

Making a case that the borrower is sufficiently willing to repay obligations when
significant derogatory information was caused by financial mismanagement is very difficult. You must be able to document that the borrower’s credit reputation is still acceptable in accordance with Section 37.7 of the Guide. It will take a longer and more convincing re-establishment period to overcome the derogatory information. A 48-month period of satisfactory re-established credit history is required (24 months for Chapter 13 bankruptcy) and all credit references must be current on the credit report and other credit documentation.

As you can see, you will have to document a lot in order to be approved for a regular mortgage. Then again, you can probably get a mortgage just not at the regular rates.

I also would like to point you to this this message board. There are a lot of people well versed in personal credit problems there that can help you.

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