Re-Establishing Credit After Bankruptcy And Foreclosure


Re-Establishing Credit After Bankruptcy And Foreclosure

This BLOG On Re-Establishing Credit After Bankruptcy And Foreclosure Was UPDATED On March 1st, 2018

Having a bankruptcy or a foreclosure is not the end of the world.

  • 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 job, even for a few months, can turn 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 being able to meet their monthly debt obligations
  • Many are forced into foreclosure and/or bankruptcy
  • Many times to both foreclosure and bankruptcy

Credit After Bankruptcy and Foreclosure

A 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 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-Establish Credit

The best way in 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 is 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 mortgage after waiting period after bankruptcy and foreclosure has 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 has been seasoned for at least 12 months

Credit Tradelines Overlays By Lenders

FHA and Fannie Mae mae does not require a certain amount of credit tradelines. But each individual mortgage lender may have their own mortgage lender 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 credit history
  • Good credit and established credit is always good

Benefits Of Good Credit

  • Good credit mean 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 report 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 loan underwriter reviews credit, they will not just check credit scores but will also review credit history.

  • As mentioned earlier, those who just filed 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:
    • 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 a good payment history

Reasons For Bad Credit

  • These types of patterns is understandable
  • Mortgage underwriters reviewing credit report 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 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 to 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

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 is not yours.

  • The three credit reporting agencies;
    • Transunion
    • Experian
    • Equifax

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 dispute 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 it to the three credit reporting agencies
  • Efforts should go to re-establishing credit by getting 3 to 5 secured credit cards with $500 credit limit
  • Credit scores will go up over time
  • I would not worry about the derogatory credit items on 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 mortgage with outstanding collections and charged off accounts without having to pay them off.

Home Loan With Bad Credit

Home buyers can get a home loan with bad credit.

  • As discussed in earlier paragraphs, home buyers can qualify for a home loan with bad credit and a prior bankruptcy and foreclosure
  • There 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
  • There is a three year waiting period 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 a FHA Loans
  • However, lenders may have overlays and require for collections and delinquent credit accounts be paid off
  • Reason for overlays is they might fear that those collection accounts will become future judgments
  • Lenders will see if borrowers has 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 mortgage

Home Buyers who need to qualify for mortgage with bad credit with direct lender with no mortgage overlays on government and conventional loans can contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at We are available 7 days a week, evenings, weekends, and holidays.

Gustan Cho

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