Real Estate Guide

Your Mortgage - Questions and Answers
'Bankruptcies, Foreclosures, and Your Credit'

• Can I refinance after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale?
• How long do bankruptcies and foreclosures stay on a credit report?
• How do you clear up bad credit?

Can I refinance after bankruptcy?

Refinancing may be prudent but could be difficult after a bankruptcy 

If you're considering bankruptcy, you may want to go to your current lender first and explain the situation. If you current and have been timely on your payments in the past, the lender may be accommodating and refinance your loan at a lower fixed rate for a longer a term, thereby reducing your monthly payments and easing your financial situation. This is called a Loan Modification.

If  your situation is only temporary, the lender may even be willing to forgo the interest or principal portion of your payment, or allow you to discontinue payment altogether for a specified time. This is called forbearance.

If the situation is long term or permanent, the lender may consider a deed in lieu of foreclosure in which they simply take possession of the home. The home, however, must be vacant and free and clear of all liens.

A second long term solution is called a short sale. Here the lender agrees to  take less than what is owed on the home in the form  of the proceeds from the sale of the home. New Federal Guidelines are in place that simplify and organize a process that was once complicated, confusing,  and not often successful.

Each of these events will, of course, affect your credit score, but some more than others. The short sale is the best of all evils. See the answer to our next question.

Resources:

• Real Estate Guide: Owning Your Home -  Foreclosure
• Real Estate Guide: Selling Your Home - Short Sale
• The Home Affordable Modification Program
• Eight Ways to improve your credit.
• Five Factors That Decide Your Credit Score
• Real Estate Guide: Your Mortgage - Credit, What Do You Do About Bad Credit?
• "The Personal Bankruptcy Answer Book"
  Authors: Wendell Schollander and Wes Schollander, attorneys at law. Publisher: Sphinx Publishing, 2009; 288 pages; $13.25

How long do bankruptcies and foreclosures stay on a credit report?

Bankruptcies, foreclosures, and short-sales can remain on a credit report for 7 to 10 years. However, this doesn't mean that you will have to wait that long to get another home loan. Some lenders will consider a borrower far sooner if they have re-established good credit or have shown a willingness and propensity to do so. It's been shown that with care and diligence, your FICO score can be above the 700 mark in as little as two years after a bankruptcy.

The circumstances surrounding the bankruptcy can also influence a lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties and you lost your job, or experienced a very expensive health related problem, perhaps the loss of a bread-winning spouse, or even divorce, a lender may be more sympathetic. If, however, you filed for bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably will be less inclined to be flexible.

You can, however, obtain an FHA loan after filing a Chapter 7 bankruptcy (liquidation) after 24 months from the date of the discharge of the bankruptcy. You also must be able to document the ability and desire to manage your financial affairs with diligence and responsibility.

You may even be able to obtain an FHA insured loan in as little as12 months after the discharge of a Chapter 7 bankruptcy, if the bankruptcy was caused by events beyond your control and you have again showed ability and desire to manage financial matters responsibly during the past year..

In the case of a Chapter 13 bankruptcy, you may obtain an FHA-insured mortgage provided that at least one year of the payout period under the bankruptcy has elapsed, your structured re-payment performance is satisfactory, and you receive permission from the bankruptcy court to take on the mortgage.

However, even beyond the damage to your ability to obtain a home loan financing, your resulting poor credit may also impact your ability to buy a car, get insurance, or even employment. Just how much do these events lower your Fico Score? According to a recent reports from major credit reporting companies Equifax, Experian, and TransUnion, the typical impact on your FICO Credit Score is as follows:

• Short sale = 80 - 130 points
• Foreclosure or Deed in Lieu of Foreclosure = 140 - 280 points
• Bankruptcy = 350 - 370 points

Take note. Some experts are now saying that the blow to a credit score caused by foreclosure, deed in lieu, or a short sale during 2008 and 2009 should be tempered by the prevailing slow economy. FICO may be forced to adjust it's credit scores to match the times. Some lenders and credit unions are already considering ways to lend to people with foreclosures and unemployment induced bankruptcies on their record.

How do you clear up bad credit?

See >> Real Estate Guide: Your Mortgage - Credit, What Do You Do About Bad Credit?