There are lots of questions surrounding bankruptcy and its aftermath, not least of which regards mortgages. In terms of mortgages after a bankruptcy there are two things that need to be looked at. First is the question of what happens with your current mortgage. Second is the idea of getting a mortgage despite having a bankruptcy on your record. We'll talk about both of those issues here, but please understand that circumstances are different for each lender. What you learn here should be applied in a general sense only.
Bankruptcy and an Existing Mortgage
If you have an existing mortgage at the time you filed for personal bankruptcy you need to understand that it is not a dischargeable debt. In other words, a mortgage is one of the few debts that the court will not dismiss in a bankruptcy proceeding. You will still be required to make your monthly payments to keep the mortgage current. If you are behind on your monthly payments, the mortgage company will be prevented in some cases from collecting on the past to balance during the bankruptcy proceeding. But once you're bankruptcy is discharged all bets are off.
If, at the point of discharge, your mortgage payments are still significantly behind your lender can foreclose on you. To avoid such action it's best to bring your mortgage payments current as soon as possible. If you can't, you need to contact your lender and work out an acceptable payment plan. Though there are some exceptions to the rule, most lenders would prefer to work out a payment plan than foreclose. Foreclosure is a costly affair in which the bank rarely recovers all of its money.
Obtaining a Mortgage After Bankruptcy
Although bankruptcy is a last resort with long-term financial consequences, it is still possible to obtain a mortgage after bankruptcy. The general rule is to wait at least two years from the date of discharge while establishing good financial discipline during that time. If you attempt to get a mortgage prior to the second anniversary of a bankruptcy discharge, lenders will tend to run away from you. When you do apply for your mortgage remember that all the same conditions apply as would have had you not filed for bankruptcy. A lender will be looking for:
- a good credit rating.
- sufficient income to make payments.
- and a favorable loan to value ratio.
Your Good Credit Rating
Assuming you're going to wait a full two years after your discharge before you apply for a mortgage, that gives you plenty of time to rebuild your credit. One of the best ways to do that is to get a secured credit card, use it on a few purchases, and make your payments in a timely manner. Other ways to rebuild credit are through dealer-finance car loans, department store layaways, and revolving credit lines at retail outlets.
With a bankruptcy on your record you'll need to have extremely good credit in order to get a favorable mortgage. A score above the 600 would be ideal. However, the only way you're going to obtain such a high score so soon after a bankruptcy is to do some of the things mentioned above as well as pay all of your regular bills on time. With regular bills we're referring to utilities, rent, and so on. If any of those normal obligations are paid late, that will only add to the negative nature of your credit report.
Have Sufficient Income
Barely anyone can get a mortgage these days unless they have sufficient income to make their house payments with one week's worth of salary. Sometimes exceptions will be made if individuals don't have outstanding auto loans or other large volumes of credit. Nonetheless, you need to be able to demonstrate you have sufficient income to make monthly mortgage payments. To determine that, you should set up a monthly budget which you will follow and modify for the entire two years you're waiting. At the end of that time you'll be able to tell whether or not you truly can afford a mortgage.
Loan to Value Ratio
When you apply for a mortgage the bank is going to look at the value of the property as compared to the amount of money you are requesting to borrow. With a bankruptcy on your record you'll most likely need to come up with 10% to 20% down in order to be approved. In terms of loan to value, that means the bank would be financing 80% of the value of the home. 80% is a comfortable number for them. If you can do better than that, you're more likely to be able to secure a mortgage.
If coming up with 20% down is a struggle for you over the course of two years, perhaps purchasing a home is not right for you at this time. You can try to offset that by asking the seller to contribute to your down payment and closing costs. Most of the time FHA will allow sellers to do that up to a total of 6% of the sale price. If you can find a willing seller this may be just enough to push you over the top.
If you've already declared bankruptcy and have made it through discharge, there's now light at the end of your financial tunnel. Now that your past indebtedness has been settled you are on the road to a brighter financial future. A mortgage might be part of that if you can maintain proper money management. Good luck!