Re-Establishing Credit After Bankruptcy And Foreclosure

This Article Is About Re-Establishing Credit After Bankruptcy And Foreclosure:

Having a bankruptcy or a foreclosure is not the end of the world. People can definitely qualify for a mortgage after bankruptcy. However, there is a minimum waiting period required to qualify for a mortgage after bankruptcy on government and conventional loans. Gustan Cho Associates offers mortgage one day out of bankruptcy and foreclosure with a 30% down payment.

Just meeting the waiting period requirements does not guarantee mortgage approval. Lenders want to see Re-Establishing Credit after bankruptcy and/or a housing event. Borrowers should start rebuilding and re-establishing credit after bankruptcy as soon as their bankruptcy has been discharged. The team at Gustan Cho Associates has helped countless borrowers get credit scores to over 700 FICO in less than one year after the bankruptcy discharged date.

Importance Of Re-Establishing Credit After Bankruptcy

Many folks who have filed bankruptcy or went through a prior foreclosure think that their days of having good credit and getting credit is over:

That is absolutely not the case. Thousands of hard-working Americans file bankruptcy due to circumstances beyond their control. A loss of a job, even for a few months, can turn the financial situation upside down and cause tremendous stress. Many of those who lost their jobs and businesses often times cannot get high-paying jobs and settle for jobs where they are overqualified and underpaid for their skills.

Being underemployed forces many people not to be able to meet their monthly debt obligations. Many are forced into foreclosure and/or bankruptcy. Many times to both foreclosure and bankruptcy.

Re-Establishing Credit After Bankruptcy and Foreclosure

Bankruptcy and/or foreclosure will plummet a person’s credit scores by 150 points or more temporarily.

However, there is light at the end of the tunnel. A person’s credit scores will naturally go back up as the bankruptcy and/or foreclosure ages. A person who filed for bankruptcy and/or had a prior foreclosure can get credit again. They will be able to qualify for a home purchase. There are mandatory waiting periods to be able to qualify again for a residential mortgage loan after someone has filed bankruptcy or those who had a prior foreclosure.

Just passing the mandatory waiting period does not automatically qualify a home buyer for home loans. Lenders want to see a mortgage applicant have re-established credit after the bankruptcy and/or foreclosure. Re-establishing credit after bankruptcy and foreclosure should be initiated as soon as possible.

Using Secured Credit Cards To Re-Establishing Credit

The best way to re-establishing credit after bankruptcy and foreclosure is by getting several secured credit cards.

Secured credit cards are the best tools in re-establishing credit after bankruptcy and foreclosure. Each secured credit card can help boost credit scores by 20 or more points after bankruptcy and foreclosure. Consumers should try to get between 3 to 5 secured credit cards after bankruptcy discharge and/or foreclosure. Not only are the secured credit cards going to help credit scores.

But it will develop credit history and most lenders will want to see a minimum of three established credit tradelines after a bankruptcy and/or housing event. Secured credit cards will open doors to unsecured credit cards and other credit for the future. Also, the credit limit on unsecured credit cards will most likely get a credit limit boost without having to put any additional deposit.

How To Start Re-Establishing Credit After Bankruptcy And Foreclosure

Many folks who just filed bankruptcy and had their bankruptcy discharge and those who just went through a foreclosure often are fed up with credit. They do not want to have any more credit and live on a cash-only basis

  • This is very understandable for those who had too much credit
  • Credit is what got them financial problems

But not having credit will actually hurt borrowers when it comes to qualifying for a mortgage after a waiting period after bankruptcy and foreclosure have elapsed.

Lenders want to see at least three to five established credit tradelines.

What Are Credit Tradelines?

What are credit tradelines?

Credit tradelines are established credit accounts such as the following:

  • credit card accounts
  • department store accounts
  • auto loans
  • student loans
  • mortgage loans
  • other installment or revolving credit accounts that have been seasoned for at least 12 months

Credit Tradelines Overlays By Lenders

Credit Tradelines Overlays By Lenders

FHA and Fannie Mae do not require a certain amount of credit tradelines. But each individual lender may have their own overlays with regards of having additional credit tradelines. Buyers intending on buying a home in the near future after a prior bankruptcy or had a prior foreclosure, just passing the waiting period is not sufficient to qualify. Late payments after bankruptcy and/or foreclosure can be automatic disqualifiers by many lenders.

Borrowers need to start re-establishing credit by getting new credit and the time to start is immediately. Remember that borrowers are not getting secured credit cards to use it. But are getting it as a tool for boosting up credit and re-establishing credit and developing a credit history. Good credit and established credit are always good.

Benefits Of Good Credit

Good credit means lower interest rates:

  • Good credit is lower rates on auto loans, mortgage loans, credit cards
  • Insurance premiums will be much lower with good credit
  • Insurance companies check credit reports and credit scores when evaluating risk factor
  • Good credit is also important when it comes to bonding license and/or business
  • Bond companies issue lower rates for those who have good credit versus bad credit
  • Good credit also is important for employment
  • Many employers check prospect’s credit reports and credit scores as part of their hiring and promotional process

Employer’s mentality is that those with good credit are financially responsible.

How Underwriters Look At Credit History

When a creditor or a mortgage underwriter reviews credit, they will not just check credit scores but will also review credit history. As mentioned earlier, for those who just filed for bankruptcy or recently had a foreclosure, credit scores will definitely get a three-digit credit drop.

Creditors and mortgage loan underwriters will review overall credit history:

  • the borrower had great credit for many years
  • Ten they will notice the sudden drop of credit scores during bankruptcy and/or foreclosure period
  • They will see re-established credit

Underwriters will then notice credit scores back on the upswing and good payment history.

Reasons For Bad Credit By Consumers

These types of patterns are understandable:

  • Mortgage underwriters reviewing credit reports will see that they are a financially responsible person because they see they had great credit for the majority of the time and had an extenuating circumstance where credit dropped
  • Mortgage underwriters will require a letter of explanation on what caused bankruptcy and/or foreclosure
  • Borrowers can write a detailed letter of explanation on the cause of bankruptcy and/or foreclosure

It can be for the following reasons:

  • loss of job
  • loss of business
  • divorce
  • medical reasons
  • death in the family
  • other extenuating circumstances

Re-establishing credit is of utmost importance and the sooner you re-establish credit, the better it will be.

Credit Repair After Bankruptcy And Foreclosure

The are many folks who recently filed bankruptcy or had a foreclosure who feel that hiring a credit repair company to fix their credit is the most important priority in re-establishing their credit.  I do not agree.

  • Someone who just had a bankruptcy discharge or just had a foreclosure finalized should spend their money in getting secured credit cards
  • Not spending it on a credit repair company
  • First and foremost, recent derogatory credit items are almost next to impossible to remove
  • Credit Repair Process

How Credit Repair Works And How It Can Backfire During Mortgage Process

Credit repair and during mortgage process

The credit repair process is mainly the process of disputing derogatory credit items by writing dispute letters to the three credit reporting agencies and stating that the derogatory credit items are not yours.

The three credit reporting agencies:

  • Transunion
  • Experian
  • Equifax

Function Of Credit Bureaus

Consumers dispute derogatory information to the three credit reporting agencies. Credit Bureaus then in turn contact the creditor that is reporting the derogatory credit to the credit bureaus and the creditor has 30 days to respond back to the credit bureaus. If the creditor does not respond back with proof that the credit dispute is inaccurate, the three credit reporting agencies need to delete the disputed item from the consumer’s credit report. Credit repair does work but not on recent fresh delinquencies.

It is easy for the creditor to pull up records of fresh documents and confirm them to the three credit reporting agencies. Efforts should go to re-establishing credit by getting 3 to 5 secured credit cards with a $500 credit limit. Credit scores will go up over time. I would not worry about the derogatory credit items on the credit report. As time passes, the old derogatory credit items will have extremely little or no impact on credit scores. Home Buyers can get a home loan with bad credit Borrowers can qualify for mortgages with outstanding collections and charged-off accounts without having to pay them off.

Home Loan With Bad Credit

Homebuyers can get a home loan with bad credit. As discussed in earlier paragraphs, homebuyers can qualify for a home loan with bad credit and a prior bankruptcy and foreclosure. The waiting period is a two-year waiting period after Chapter bankruptcy discharge to qualify for FHA and VA Loans with re-established credit. There is a three-year waiting period after three years from the recorded date of a foreclosure and/or deed in lieu of foreclosure or short sale to qualify for FHA Loans. The waiting period is three years after the short sale HUD settlement statement date for those with a prior short sale to qualify for FHA Loans.

If the homeowner was current on his or her mortgage payments until the date of the short sale, there is no mandatory waiting period to qualify for government and conventional loans. However, many mortgage lenders want homeowners to skip a mortgage payment in order for the short sale to be effective. This one late payment will cause a three-year waiting period after a short sale.

FHA Loans With Outstanding Collections And Charge Offs

Home Buyers can qualify for a residential mortgage loan with open collections and prior bad credit. FHA does not require you to pay off old collection accounts in order to qualify for an FHA loan. However, lenders may have overlays and require collections and delinquent credit accounts to be paid off.

The reason for overlays is they might fear that those collection accounts will become future judgments. Lenders will see if borrowers have re-established credit after bankruptcy and/or foreclosure. Re-establishing credit after bankruptcy and/or foreclosure is an absolute must for those to qualify for a mortgage.

Benefits Of Bankruptcy

Going through bankruptcy can be a tough situation. Bankruptcy can save many Americans from their current financial situation. Filing bankruptcy is not everyone’s first choice. But it’s sometimes the only option. Many of our clients are currently in a Chapter 13 Bankruptcy or less than 2 years out of a Chapter 13 bankruptcy. It can be a struggle to see your credit score recover after filing or discharging a bankruptcy. In this blog, we will give you a few pointers on how to qualify for a mortgage during or after bankruptcy.

Qualifying For FHA And VA Loans During Chapter 13 Bankruptcy Repayment Plan

FHA and VA have the exact same guidelines when it comes to qualifying for a mortgage during Chapter 13 Bankruptcy Repayment Plan. VA and FHA are the only two mortgage programs that allow borrowers to qualify for a mortgage during Chapter 13 Repayment Plan:

  • It is important to understand that per HUD guidelines, you can obtain a mortgage while in an active Chapter 13 Bankruptcy
  • The same is not true for a Chapter 7 bankruptcy
  • But while in a Chapter 13 repayment plan, as long as 12 on-time payments have elapsed, you are then eligible to enter into a mortgage with the permission of your trustee
  • You must use a VA or FHA loan. It can sometimes be difficult to get your credit score above 580 while in an active chapter 13 bankruptcy
  • Many times, your trustee does not want you to acquire new debt or open new tradelines
  • I bring this up because your credit score does need to be above 580 to utilize a 3.5% down payment on an FHA loan
  • Otherwise below 580, a 10% down payment is required

If you are below 580, we suggest you ask the trustee to open a secured credit card. You have a better chance of the trustee saying yes to a secured card vs a typical revolving credit card.

Re-Establishing Credit After Bankruptcy And Foreclosure To Qualify For FHA And VA Loans

The main topic of this blog is “re-establishing credit after a bankruptcy”. If you are going to obtain a mortgage while in active chapter 13 or less than two years out of the repayment plan, re-establishing credit will help you secure the loan. While it is not mandatory per HUD guidelines, it will definitely help your overall loan application.

The main reason reestablishing credit is important is the impact it has on your overall credit score. As you may know, it is hard to raise your credit score. The credit score will determine the interest rate you qualify for. Obtaining a lower rate will increase your purchasing power or save you on your overall monthly payments. Everyone likes a lower payment!

Importance Of Re-Establishing Credit After Bankruptcy And Foreclosure

The general rule of thumb of a re-established tradeline is an open tradeline with zero derogatory marks for 12 months. This is part of the reason there is a 12 payment history requirement on your chapter 13 bankruptcy before you can enter into a new FHA mortgage. The same is true for loan modifications, we must verify 12 payments have been made on time to the modified mortgage before you met refinance or purchase a new home with a VA or FHA loan. That being said, after a bankruptcy it is important to re-establish a positive tradeline or tradelines.

Contact Us At Gustan Cho Associates With Help In Re-Establishing Credit After Bankruptcy To Qualify For Mortgage 

The team at Gustan Cho Associates are mortgage experts who helped many clients who have dealt with or are dealing with bankruptcies. Gustan Cho Associates can help borrowers in Re-Establishing Credit After Bankruptcy And Foreclosure. We have seen every credit profile on the planet, from the good, to the bad, and even to the ugly. If you do not qualify today, we will put you on a financial plan to qualify as soon as possible. If you are in the home buying market and have questions on mortgage qualifications surrounding bankruptcy, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected]m. Even if you are one day out of a Chapter 7 bankruptcy, we have a full slate of NON-QM mortgage programs that can help you. Gustan Cho Associates is one of the very few national lenders that offer mortgages one day out of foreclosure and bankruptcy.

This BLOG On Re-Establishing Credit After Bankruptcy To Qualify For Mortgage Was UPDATED On July 27th, 2021

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