THE BIG BK

(Bankruptcy and your credit)

For the purposes of this article I am going to assume you know the basics of your credit score and what makes it go up and what causes it to come crashing down.

Instead, I am going to write from the point of view of the loan officer and attempt to shed some light on how we (the industry professionals) view your credit.

Let's began with the biggie, bankruptcy. It seems to be a common belief that having the big BK on your credit report is equivalent to excommunication from the lending community, making it impossible to obtain any type of loan.

So what are the facts about your credit report and bankruptcy? First off it will be on your report for seven years, so get used to seeing it up there. For many people, a BK will drop their score firmly into no mans land-below 500-making it impossible to obtain a loan.

You credit score after the BK partially depends on what the score was prior to the bankruptcy. If you had been struggling for awhile to keep afloat, you score probably has been steadily dropping so you may very well have a score in the four hundreds.

On the other side of the coin, I have seen people with a BK on their report and have been surprised to find their scores in the mid to high six hundreds. These people may have had stellar credit and were able to barely keep up with the bills, until the last minute. Perhaps they saw where they were headed and chose to do the BK right away to limit the possible damage. Or it could be as simple as the fact that their bankruptcy was five or six years ago.

Whatever the case may be, it is vitally important that you keep up with whatever debt you have accrued since the unfortunate event. Too many times I have begun working with a borrower who had opened numerous small credit cards after their bankruptcy and defaulted on every one of them. After your bankruptcy it is important to establish good credit and to show you will not make same mistakes of the past.

There is no set rule as two how much time must pass between the discharge of your BK and obtaining a loan. As long as your mid foci score is 500 or above you have a chance. Many lenders will refinance your home even before your BK has been discharged. You will have to jump through some hoops though. That could mean going to the bankruptcy judge and getting a bankruptcy rating from them, much like getting credit report to show if you have been paying your mortgage payments on time. For most lenders you have to have a stellar bankruptcy rating with no lates. If you cannot show a perfect score there you will have to wait until your BK has been discharged.

Many lenders will not let you get any cash out so you can forget about that trip to Vegas. Some require your new interest rate to be lower than your current one. With a low credit score and BK, that may be, and many times is, impossible. They will not take in account that you will be able to lower your over all monthly out put by wrapping all your short term debt to a long term mortgage. Many just want to see a lower rate and are unwilling to bend on that rule.

Most lenders have strict guidelines as to the LTV (Loan to Value) they are willing to accept. Some lenders will cap you off at an LTV of 50% or slightly higher. Quite often this is an issue unless you have been in the house for quite some time. It is likely your prospective lender will require you to do a conservative, full doc loan. No way can you get away with a no doc or stated loan again.

You may find that it will be easier to just wait till your bankruptcy has been discharged. That will open more doors and the guidelines will be looser. Some companies require you to wait one or more years after discharge before obtaining a new loan, but not everybody. I have refinanced people prior to discharge and just after discharge. It all depends on the individual lender and your states bankruptcy laws. A lot of things have changed since the industry's high profile meltdown, and rules and regulations continue to change, so you have some research to do. Since this can become quite complicated you may want to put in a call to a mortgage broker and get them working for you.

Should you decide to call a broker make sure he knows where you stand with your credit and finances, and he should also know exactly what you are looking for so that he is not barking up the wrong tree. I would also try to get some idea as to whether a loan is possible with your credit issues. While no one can be sure without pulling your credit and going over lenders guidelines, he should be able to give you an idea of where things stand.

Many Mortgage professionals will want to pull your credit right away because it tends to make the borrower feel committed to him and less likely to find a different lender. A good mortgage guy will know half way into your conversation whether or not he will be able to close your loan; I know I could do that. A broker who hedges and will not say anything until he gets your report may not know the market well. Perhaps he is new to the industry. Keep in mind once your credit is pulled the clock starts ticking. Now he can pull it as many times as he wants in a thirty day period and you will only take one small hit. Once you stray outside that time limit you will take another hit. Keep in mind that since the mortgage meltdown lenders have tightened their lending guidelines so much of what would fund two years ago will not fly in todays market.

Once more, in my experience, the lending company is only as good as their front line sales force. Therefore it is imperative that you find an individual you can trust.

Good Luck and Happy Investing,

Keith