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Because the new bankruptcy laws go into effect on October 17, 2005, more Americans than ever are filing for relief using the federal bankruptcy laws. The vast majority are simply overextended and cannot possibly repay the obligations they have open.
However, for many filers, the opportunity of homeownership may be possible immediately after discharge. Ironically, some those that would not previously qualify for a mortgage do qualify after a bankruptcy.
How is that possible? An example of this is Dave Olson (a fictional character). He earns $4,000 per month, spends $1,000 on rent,$250 on car payments, and $2,000 on credit card minimum payments. The DTI* (debt-to-income) ratio of this person is 81.25%. Since his credit score is low (600 middle FICO), the only option is a mortgage that requires full documentation. Most of those loans require a DTI of 50-55% maximum.
The Chapter 7 bankruptcy is filed and Dave gets a discharge. He reaffirms his auto loan and still rents for $1,000/month. However, now his monthly debt is much lower (($1,000+250)/4,000=31.25%).
The bankruptcy has actually increased his chances of obtaining financing for a purchase. Many times, the credit score is the same after the bankruptcy as prior to filing (unless creditors report incorrectly). By filing simple dispute letters with the three credit bureaus, those discrepencies can be cleared up within a few months.
It makes sense that borrowers are most ready to borrow for home purchases after bankruptcy because they cannot file Chapter 7 for 6 years, their obligations are lowered, and the property being purchased is secured. That means the lender can repossess the property if payments are not made timely.
There are some things to keep in mind if you are purchasing a home after a recently discharged bankruptcy.
1) A downpayment isn't always necessary, but it will improve the rate.
2) Most people opt for an Adustable Rate Mortgage (ARM) since the rates are much lower than a fixed and they plan to refinance in 2-3 years.
3) Most of these loans have a prepayment penalty that matches the fixed period of the financing.
4) Most lenders require cancelled checks or verification of rent paid not later than 30 days in the past 12 months.
5) A foreclosure before the bankruptcy is hard to overcome. A foreclosure as a result of the bankruptcy usually doesn't count.
Everyone's situation is different. To ensure the best service, be sure you contact an experience mortgage originator that will take the time to listen to your situation and explain all the possibilities. It shouldn't cost you anything to inquire.
About the Author
Clinton Bengtson has been a mortgage originator (loan officer) for almost 5 years. Prior to that, he was a CPA working at several large companies. Clint Bengtson has helped hundreds of people become homeowners that were declined at other lenders. Experience is important and can mean the difference between approved and not approved. Visit his website at http://www.mnmortgage.net for more information.
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