Getting Approved For a Mortgage After Filing For Bankruptcy
A mortgage is probably the most popular home loan on the market, since it either allows people to buy their first home or get their hands on some liquid cash. For these two reasons, mortgages are often the first loans that people apply for after successfully filing for bankruptcy. There are some restrictions, however. Most mortgage lenders, even the Federal Housing Administration, require a waiting period of at least two years before they will approve any loan to a borrower with a bankruptcy on their record.
During these two years, the borrower must have maintained perfect credit and not incurred any additional debt. Even if the borrower meets these qualifications, they may not get the loan if market conditions are unfavorable. The most important thing is to make sure that the borrower has fixed their credit report. Most people do not know that their credit reports can have accounts listed as open and overdue when they were supposed to have been included in the bankruptcy. It is up to them to call the credit bureaus and demand that their reports be updated. Without taking this step, it is unlikely if not impossible that they will ever be able to get a mortgage anytime soon.
The biggest thing to remember is that creditors distinguish borrowers by their financial history. A bankruptcy represents the worst-case scenario for a lender because it shows that the borrower is willing and able to simply walk away from their debts. If that is the case, why would the lender give them a mortgage if the borrower could just walk away from it later? The answer is because the borrower cannot file for bankruptcy again for seven to ten years. This means that the lender can be assured that the borrower will not file for bankruptcy because they cannot file for bankruptcy.
From the borrower's perspective, this is not good. What is the best way for them to get a mortgage without getting involved in questionable lending practices like sub-prime lending? Apply for a loan from the Federal Housing Administration, or FHA. The FHA has programs whereby they will lend a mortgage to borrowers with bad credit, bankruptcies, etc. The borrower has to have met the minimum criteria of no further financial missteps for two years and maintained a perfect record during that time. If the borrower does meet these criteria, the good news is that they are virtually guaranteed to get a mortgage.
The FHA lends mortgages by having the borrower go to an approved FHA lender. Once the lender approves the loan, they actually make the loan and the FHA promises to back them up if the borrower defaults. Since the FHA offers very favorable interest rates, this is unlikely to happen as the borrower knows it is bad news for him if he defaults on a loan from the FHA since he cannot file for bankruptcy again. Therefore it is in his best interest to keep his finances over because he knows he is basically living on borrowed money.
