Bankruptcy And Foreclosure: Re-Establishing Credit During Waiting Period

Life is not over after bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  People go through financial crisis such as job loss, business loss, divorce, medical issues, and other extenuating circumstances where their household income is lost or has been greatly reduced.  On the positive note, everyone recovers and life goes on.   For those folks who have gone through a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, they can qualify to purchase a home, however, there are mandatory waiting periods they need to abide by.  Here are the mandatory waiting period requirements.

1.  Bankruptcy:  There is a mandatory 2 year waiting period from the discharge date of the bankruptcy to qualify for a FHA insured mortgage loan.

2.  Foreclosure and Deed in Lieu of Foreclosure:  There is a mandatory 3 year waiting period from the recorded date of the foreclosure or the date of the sheriff’s sale.  The waiting period time time clocks starts the date the name of the homeowner has been transferred out of their name to the mortgage lenders name.

3.  Short Sale:  There is a mandatory 3 year waiting period from the date of short sale.  Borrowers need to provide the HUD Settlement Statement and normally that date is the waiting period time clock starts.

Once your bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale is reported to the three credit bureaus ( Transunion, Experian, Equifax ), your credit scores will most likely plummet by at least 150 FICO point or more.  However, your credit scores will gradually improve slowly over time.  Just because you have passed the mandatory waiting period does not automatically qualify you for a mortgage loan.  Mortgage lenders want to see that you have re-established your credit and by re-establishing credit during waiting period will expedite increasing your credit scores.   Many mortgage lenders want to see three established credit tradelines that has been seasoned for at least 12 months while others require 24 months of re-established credit.  You cannot have a late payment after a bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.    There are many ways of re-establishing credit during waiting period.

 Re-Establishing Credit During Waiting Period: Secured Credit Cards

Getting secured cards is the best way of re-establishing credit during waiting period.  Get three secured credit cards with at least a $500 credit limit.  Three secured credit cards will have the maximum effect in increasing your credit scores.  Make sure you are never late with the minimum payment.  Each secured credit card should boost your credit scores by at least 20 points.  Do not have no more than a 25% credit balance in each of those secured credit cards.  Do not apply for unsecured credit because the chances are that you will not get approved.  Hard inquiries will hurt your credit scores and each hard inquiry will drop your credit scores by at least 5 points.  Multiple hard inquiries do not look on your credit report and mortgage underwriters will frown on multiple credit inquiries.

Rental Verification And Overdrafts: Re-Establishing Credit During Waiting Period

Rental verification shows great weight for mortgage lenders.  Always make your rent payment with a bank check.  Rental verification, although not reported to the credit bureaus, carries more weight than any new credit items that is reported on your credit report.  The only way that you can prove rental verification is to provide 12 months worth of cancelled checks to the mortgage loan underwriter.

Never bounce a check.  A $5 dollar overdraft can be a deal killer.  Get yourself overdraft protection.  Mortgage lenders do not want to see any overdrafts in the prior 12 months.  One of two overdrafts will most likely not be a deal killer but you will be limited on which mortgage lender will accept your mortgage application.

Credit Scores During Re-Establishing Credit During Waiting Period

If you follow my advice on re-establishing credit during waiting period, your credit scores will go up over 100 points or more during the course of 12 months.  There are many cases where I have seen mortgage loan borrower’s credit scores over 700 FICO after a year of filing bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale.  As time passes, the less impact your prior bad credit will have on your credit scores.  One late payment will drop your credit scores by more than 80 points so make sure that you religiously pay your minimum payment on time.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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