Bankruptcy Revisited

Here is another look at the B word, bankruptcy, and how your lender treats it. If you have gone through a BK recently or are considering it, you may want to take a look at this.

I am not going to attempt to give you advice or guidance on whether you should file for a bankruptcy or not. What I do want to do is let you know how a lender will treat your bankruptcy.
First of all, having a recent bankruptcy on your credit is not an insurmountable problem. There are a lot of borrowers out there refinancing that have a BK on their credit report. Here are some things to keep in mind when preparing to refinance.
·         You can refinance even if your BK was discharged less than a year ago
·         You can refinance before you BK has been discharged
·         Your score does not always dip under 500
The information I provide here will not be applicable to every lender, as each has its own guidelines, however lenders are surprisingly similar.
In all three of the places I worked, they allowed borrowers to refinance before a year had passed since the discharge date. There are some strict guidelines though, and you and your loan officer need to do some research before submitting a loan. One of the guidelines has to do with acceptable loan to value. Most lenders will only allow you to borrow 50 to 60 percent of the home’s value and that right there can kill a deal.
Many times borrowers are driven to bankruptcy due frequent refinancing that has eventually stripped all the equity out of the home making it impossible for just one more refi. Now the borrower is saddled with too much debt and a house note they can no longer afford. Unfortunately for the borrower this in this situation, there is usually not enough equity left to qualify for a refinance and they are stuck with the BK. Do your footwork, find out how much your home may be worth then start crunching the numbers. It’s a lot better to find out you don’t have enough equity before the loan is in process. If your bankruptcy is structured where you are making payments then you will need to get a bankruptcy rating, similar to a mortgage rating. Your bankruptcy is viewed as your last hope, so if you have had issues making your bankruptcy payments or are behind, most likely your lender will not want to refinance.
If you are unable to refinance prior to discharge, many lenders will refinance you even though it has been less than a year since discharge. If you or your lender is unsure of the discharge date look through your credit report and it is usually reported there. It is a good idea though to keep your discharge paperwork because that will also show the date of discharge. It will also list all of the debtors covered in the bankruptcy which can be a godsend if some of the companies on your credit report still show as active and not covered in the BK (Bankruptcy).
Lenders will look closely at your post BK credit history, and if that is rocky, your score may not have recovered enough to make a loan possible. Some lenders will still shy away from a borrower who has post BK dings even though his credit is above 500 because is leads the lender to believe nothing has changed with the borrowers spending habits. The lender will think that there is going to be another BK or a foreclosure in the near future.
So, while you can still refi right after a bankruptcy, the odds are pretty much stacked against you. You should keep in mind that your BK will stay on your report for at least seven years, if not ten. Clean up your act and show you have learned something through the BK. Keeping your post BK report squeaky clean will go along ways in demonstrating what you have learned.
If you have a perfect bankruptcy rating, enough equity, and a tri-merged score above 500 you may be a good candidate to refi out of the BK and that will be reflected well on your credit report. You may find your lender is going to be tighter with income guidelines, and you may need to be able to show all your income in the traditional way with W-2’s and pay stubs.
So good luck with the BK and happy searching for a loan.

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