Mortgage After a Foreclosure & Bankruptcy

Qualifying for a mortgage after a foreclosure and bankruptcy will take some time. Lenders are free to set their own standards, but generally most banks and mortgage companies will want assurances that you have learned to handle credit responsibly. The Federal Trade Commission reports that bankruptcy is the most negative information that can be listed on your credit report, and foreclosure information is also extremely harmful. Having bankruptcy and foreclosure information on your credit report at the same time will prompt concern about your financial judgment.

Fair Credit Reporting Act

The Fair Credit Reporting Act, a federal law, allows the major credit bureaus to report foreclosure information for up to seven years and bankruptcy information for a minimum of 10 years. Despite the claims of some credit repair agencies, there is no legal or ethical way to remove the information sooner. Applying for a new mortgage will require you to be upfront about your past; and when you do apply, you should submit a written statement with your application, explaining the circumstances behind the foreclosure and bankruptcy.

Time Line

A lender comfortable with bad-credit borrowers could approve you for a mortgage less than a year after your foreclosure and bankruptcy are complete. However, you likely would be forced to pay an exorbitant interest rate, something you should avoid as you make a fresh start. Neighborhood Partnership Housing Services, a nonprofit consumer organization, reports many mortgage companies follow Fannie Mae guidelines requiring a waiting period of three to five years after foreclosure and two to four years after bankruptcy.

FHA Flexibility

Loans insured by the Federal Housing Administration (FHA) offer lenders greater flexibility, with approval possible even before the borrower completes a Chapter 13 bankruptcy. Chapter 13 is a popular form of personal bankruptcy and requires a payment plan to creditors lasting three to five years. FHA.com reports that new mortgage loan approval through FHA is available a year into a Chapter 13 bankruptcy. However, the purchase must be made with the written permission of the bankruptcy court, making the option a long shot in most cases.

Credit Rehabilitation

Regardless of the wait, mortgage companies will carefully study how well you have been paying your bills in the months or years leading up to your loan application. Lenders following Fannie Mae guidelines require on-time rent payments for 12 consecutive months before you apply and no more than two late payments on automobile loans, credit card payments and other credit accounts over 24 months.

Credit Score

Building a good credit score will be helpful as well, although as of 2011, FHA was approving loans on credit scores as low as 500. However, a borrower with a foreclosure and bankruptcy on his record may be held to a higher standard. Privacy Rights Clearinghouse, a nonprofit consumer information company, reports that a score of a least 620 is roughly the minimum for standard interest rates, with scores of 720 or higher preferred. Privacy Rights reports that the best way to build your credit score is to pay your bills on time and keep debt levels low.

References

• Neighborhood Partnership Housing Services: Fannie Mae Updated Credit Guidelines
• MSN Money: Bounce Back Fast After Bankruptcy; Liz Pulliam Weston; February 2009
• Federal Trade Commission; Credit Repair: How to Help Yourself; October 2008
• FHA.com: FHA Requirements: Credit Guidelines
• "The Washington Post"; The FHA's Balancing Act; Dina ElBoghdady
• Privacy Rights Clearinghouse: Your Credit Score -- How It All Adds Up; August 2010