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Obtaining a mortgage after filing for bankruptcy

As discussed in the previous blog, Chapter 13 bankruptcy is a type of reorganization bankruptcy, where the debtor enters into a structured repayment plan over a period of three to five years. This is opposed to Chapter 7 bankruptcy, which is a liquidation bankruptcy. Both Chapter 13 and Chapter 7 bankruptcy have their benefits. In fact, many of the negatives associated with filing for either Chapter of bankruptcy are simply not true.

Among the many questions asked by Tennessee residents considering bankruptcy is, how long, if ever, will they be able to obtain a mortgage, or refinance their existing home loan, after they file for bankruptcy. The concern, of course, is that it will be seven to 10 years before they can qualify since that is how long bankruptcies stay on credit reports. This, however, is not true. In reality, in some circumstances people can become eligible in as little as one year.

The seven to 10 year misnomer likely stems from the time period a bankruptcy stays on a person's credit record. While that may be true, consumers begin rebuilding their credit immediately after they file for bankruptcy and there are many ways to rebuild credit. Some available ways to rebuild credit include paying utility bills on time or obtaining a secured credit card. For the most part, lenders just want to see that the consumer is back on track before lending again.

If a bankruptcy is the result of one-time occurrence such as a death in the family or divorce, it is also possible for consumers to write hardship letters explaining the situation to new lenders. A hardship letter backed with documentation, such as medical bills or divorce papers, can alleviate a lot of the concerns lenders might have lending to someone who just filed for bankruptcy. At the very least, it can shorten the waiting period dramatically.

In addition to rebuilding credit and talking directly with the lender to alleviate any concerns, the fact is, most conventional mortgage guidelines, whether they are through Fannie Mae or Freddie Mac, call for a wait time of two to four years after a person files for bankruptcy. In the case of a mortgage guaranteed by the Federal Housing Administration, new mortgages are permitted after one year with a Chapter 13 bankruptcy and two years with a Chapter 7 bankruptcy.

Source: CNBC, "Mortgage: Life After Bankruptcy," Vickie Elmer, Sept. 17, 2012

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Mark T. Young & Associates
2895 Northpoint Blvd.
Hixson, TN 37343

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