Many of those that have been through bankruptcy think that it will be many years before they can obtain a mortgage or refinance an existing home loan. In reality, they could become eligible in as little as one year, as long as they work diligently to improve their financial picture.
Mortgages guaranteed by the Federal Housing Administration are permitted one year after a consumer exits a Chapter 13 bankruptcy reorganization 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.
“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.
Rebuilding credit after a personal bankruptcy will take some work. Individuals should maintain or take out one or two credit cards and routinely use them. Make the payments early and avoid using all of the available limit on the card. As a general rule, using less than one-third will cause a score to rise, using one-half will cause the score to remain the same and using over that amount or exceeding the limit can actually have a negative affect.
A personal bankruptcy filing will have a larger impact on a credit score than any other credit issue, according to a July report by VantageScore, which provides credit scores to lenders. Filing for bankruptcy protection will reduce a credit score by 200 to 350 or more points, it said, compared with a decline of 80 to 170 points for a foreclosure. VantageScore’s scores range from 501 to 990.
For the larger rival FICO, bankruptcy could cut a credit score by 130 to 240 points.