Can you obtain a mortgage or refinance a mortgage after personal bankruptcy?

The New York Times dispels some myths about the effects of a bankruptcy on the filer’s ability to obtain home mortgage financing.

The article entitled, “Life After Bankruptcy” that appears in the New York Times web edition, asserts that many bankruptcy filers mistakenly believe that it will be many years before they can either obtain a home mortgage or refinance an existing home loan “because notice of a bankruptcy filing typically stays on a credit report for 7 to 10 years. In reality, they could become eligible in as little as one year, as long as they work diligently to improve their financial picture.”

The article continues, “Mortgages guaranteed by the Federal Housing Administration are permitted one year after a consumer exits a Chapter 13 bankruptcy reorganization, which requires a repayment plan that is often a fraction of what is owed, and two years after the more common Chapter 7 liquidation, which discharges most or all debts. Conventional mortgage guidelines from Fannie Mae and Freddie Mac, meanwhile, call for a wait of two to four years.”

I fully endorse this recommendation: “’There’s a lot of other things that go into your ability to get approved’” for a mortgage after a bankruptcy, said John Walsh, the president of Total Mortgage, a direct lender based in Milford, Conn.”

“The most important point, he and other industry experts say, is that consumers re-establish their credit and show that they can manage it responsibly. They can do this by paying rent and utility bills on time, or perhaps by obtaining a secured credit card, according to Mr. Walsh.”

Ideas for Action:

• “Rebuilding credit after a personal bankruptcy will take some work. Mr. Feinstein suggests that individuals maintain or take out one or two credit cards and routinely use them. ‘If the payment’s due on the first, make sure it’s paid by the 25th’ of the previous month, he said.”
• “Mr. Feinstein says he has seen a few clients qualify for a mortgage only two years after filing for Chapter 7, though generally borrowers can obtain a loan quicker after a Chapter 13 reorganization, because of the partial repayment of debts, he said.
  “As Mr. Walsh noted, “Chapter 13 is a little more responsible” way to go from the lenders’ perspective, so lender guidelines are a bit more lenient.”
• “Almost 70 percent of personal bankruptcies are filed under Chapter 7, according to the American Bankruptcy Institute, a research organization. The institute data noted that last year there were 1.362 million personal bankruptcy filings nationwide, down from 1.53 million in 2010, and closer to the norm over the last 15 years. At the end of the first quarter of this year there were 311,975 filings, which is 5 percent less than the first quarter of 2011.”
• This post originally appeared in my free newsletter. If you have comments or suggestions, we would love to hear them—just send us an email using the form on our website, or give us a call at (253) 383-1001. If you found the newsletter article useful, and you’re not already a subscriber, we would appreciate it very much if you would please sign up to receive future editions for free by using the sign up form in the left hand column of each page on this website. We will never sell your address. You may unsubscribe from the newsletter at any time by emailing us or using the unsubscribe link that is on every edition of our newsletter. We hope that you won’t ever unsubscribe, though, and that you will find our newsletter to be a useful source of information for years to come.