Home Loan Approval After Bankruptcy

Buying After BK In AZ

Buying in AZ After A BK

Once a prospective home buyer has waited for enough time to pass after their bankruptcy discharge date in order to be qualified for a new mortgage they are not necessarily out of the woods yet.  While an Arizona mortgage underwriter will be looking to see if the buyer is far enough past their bankruptcy to be eligible for a new mortgage (Learn more about how long one must wait after a bk) they will also be very closely scrutinizing all of the credit activity since the bankruptcy was discharged.

Arizona Mortgage guidelines allow borrowers to make a “fresh start” after a bankruptcy.  Home loan underwriters want to see that a home buyer is far enough away from the circumstances that caused them to file bankruptcy in the first place.   This helps to reduce the likelihood that the borrower is still in financial trouble  and therefore limits the possibility that the borrower may not make their mortgage payment as a result.

In addition to making sure the proper amount of time has passed, an underwriter will also look to if the borrower has shown that they have recovered from their previous hardship.  A post bankruptcy borrower should be able to demonstrate an ability to pay their bills on time and that they can responsibly manage their finances.  The post bankruptcy borrower will be measured agains one of two primary rules when applying for a new mortgage:

1. Have they re-established credit after their bankruptcy discharge date   OR
2. Have they decided not to incur new debt after their bankruptcy discharge date

Post Bankruptcy Credit Behavior

As I mentioned above, an underwriter will look to see if a post bankruptcy borrower has re-established credit or if they decided not to incur any new debt after a bankruptcy.  Let’s dig into each a little further:

Re-Established New Credit

A mortgage underwriter needs to see that a borrower has successfully and responsibly re-established their credit profile after their bankruptcy.   Credit re-establishment in the mortgage world involves opening new credit accounts (credit cards, auto loans etc…) after a bankruptcy and/or showing a solid payment performance on all accounts that they did not discharge in the bankruptcy.   If a post bankruptcy borrower has any late payments or non medical collections show up on their credit with effective dates after their bankruptcy discharge date it will be very difficult for that borrower to obtain Arizona home loan approval.   Why?  In a mortgage underwriter’s mind, post bankruptcy late payments and/or collections clearly illustrates that the post bankruptcy borrower has NOT learned to manage their finances after going through bankruptcy.   The mortgage world is okay with a bankruptcy  as a fresh start however if the borrower did not learn to make timely payments and fulfill their financial responsibilities after going through the bankruptcy mortgage approval may be tough to obtain.

Decided To Not Incur New Debt:  What about the post bankruptcy borrower that decided not to jump into debt after their bankruptcy was discharged?  After all, many folks choose to stay as far away from credit cards, car loans and other financial obligations after they suffered through a bankruptcy.     In this case there is no way for a borrower to show an underwriter that they have learned to pay their bills on time if they adopted a “no-debt” lifestyle.   The good news is that a mortgage underwriter will accept a detailed letter explaining why the post bankruptcy borrower does not show any current/new debt on their credit report.   However, even if the post bankruptcy borrower opted out of incurring new debt they will likely need to show some evidence that they have paid their “regular” bills (the one’s that do not appear on a credit report) on time.  We call bills that do not appear on credit “alternative credit” and they include obligations such as rent payments, auto insurance payments, cell phone payments and utility payments.   Click HERE for more information on how to document alternative credit.

3 Tips to Buying After a Bankruptcy

As you can see, managing finances and paying bills on time  after a bankruptcy is extremely important if the goal is to eventually get approved for a Phoenix area mortgage.  In short, there are 3 main tips that I suggest to anyone going through a bankruptcy who wants to eventually be able to obtain a home loan:

1. Make rent payments on time (make sure to pay rent in your name in a manner that can be documented – check or auto draft from a bank account – no cash or money order payments)

2. Do NOT miss a payment on any obligation (including bills that report to a credit report AND bills that do not report to a credit report)

3. Open at least 1 account that will report to your credit after a bankruptcy (the sooner one obtains a new credit account after a bankruptcy the better)

Please feel free to call or email me if you have any questions on getting approved for a home loan after a bankruptcy.

By Jeremy House
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