Home Loan Approval After Bankruptcy

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While waiting the prescribed number of years after a bankruptcy is key, Arizona home-buyers must also pass another test prior to home loan approval.   After-all, a mortgage underwriter scrutinizes credit quality since a bankruptcy in addition to just counting calendar pages.

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Post Bankruptcy Elapsed Time and Credit Quality Matter

Borrowers get a “fresh start” after a bankruptcy.  While the amount of wait time varies from loan type to loan type,  home loan underwriters need to confirm home buyers are far enough from their bankruptcy.   Being the required distance from the turbulent times that led to bankruptcy reduces the chance that history repeats itself.  In other words, borrower’s further from their bankruptcy are more likely to make their home loan payments.

In addition to ensuring the right amount of time has passed, mortgage underwriters review a borrower’s recovery state.  Post bankruptcy borrowers should show the ability to pay bills on time.  This fact is measured against in one of two 2 ways:

  1. Has the borrower re-established credit post bankruptcy OR
  2. Did the borrower decide not to incur new debt after their bankruptcy

Post Bankruptcy Credit Behavior

As stated above, underwriters verify whether a borrower re-established credit or decided to not incur new debt after bankruptcy.

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Re-Established New Credit

Credit re-establishment involves opening new credit (credit cards, auto loans etc…) as well as showing solid payment performance after a bankruptcy Post bankruptcy borrowers with late payments or non medical collections may find it hard to obtain a new Arizona home loan.   Why?  To a mortgage underwriter, late payments and/or collections show the post bankruptcy borrower did not learn to manage their finances.

Decided To Not Incur New Debt

Many consumers opt to stay as far away from new debt after a bankruptcy.   As a result, there is no way to prove they learned financial management skills.  This is actually okay.  Home loan underwriters accept explanation letters from those who chose to live the “no debt” lifestyle.  However, even if the no debt lifestyle leading post bankruptcy borrower may need to show proof they paid “regular” bills (the one’s not on a credit report) on time.  These bills are called “alternative” or “non-traditional” credit.  For example:

  • rent payments
  • auto insurance payments
  • cell phone payments
  • utility payments

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3 Tips to Buying After a Bankruptcy

As you can see, managing finances after a bankruptcy is key when the goal is getting 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 obtain a home loan:

  1. Make rent payments on time
  2. Do NOT miss any regular payments
  3. Open at least 1 account that will report to your credit after a bankruptcy

By Jeremy House


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