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Planning for a Mortgage Application After Bankruptcy

Getting approved for a mortgage after a bankruptcy has always been tricky. Now, it is very difficult in the current mortgage climate, but it is not impossible.

The best way is to plan ahead, the same as with any real estate or mortgage transaction. The time to worry about how to get the next loan is before filing bankruptcy. Most people do not have a plan and the process after the BK is a lot more difficult.

All lenders follow the same basic underwriting rules for standard loan types. If you understand these rules it will help while planning the next move.

For conventional mortgages a Chapter 7 or 11 Bankruptcy must usually be discharged for 4 years. In rare exceptions such as a BK caused by the death of a wage earner it may shorten the waiting period to only 2 years. And a Chapter 13 might also get by with only 2 years. Notice I did not say an exact period but used words like “usually” or “might.”

Borrowers with a bankruptcy in the last 7 years will always require manual underwriting by an actual live mortgage underwriter as opposed to automated underwriting software. They will look at the entire loan application, not just the credit report. So the entire application must make sense to the underwriter.

For example, if the BK was caused by the death of the primary wage earner and the surviving spouse has made several late payments after the BK was discharged then the mortgage loan application will probably be denied even if 3 years have passed. The BK did not solve the cash flow problem.

The waiting period for an FHA mortgage is only 2 years, but how the risk is evaluated is very similar to the conventional method above. Line-by-line and word-by-word and it must make sense.

Think of a bankruptcy as a turning point, POOF!! All debts are gone so things should get better. An underwriter is not going to approve new debt if things did not get better as planned.

The quickest way to get approved for a mortgage after the turning point is to run a very, very tight ship following the discharge date. Keep copies of every financial transaction, and never miss a payment. Re-establish credit as soon as possible if all previous accounts were closed in the BK.

One little known fact is that a loan applicant is allowed to submit any form of documentation that proves their case when applying for a mortgage. Start a budget on day one following the discharge date and keep detailed records of funds coming in and going out. In the past 20 years only one client has furnished me a copy of their household budget, one client out of thousands! I remember him and it was years ago. That kind of unusual documentation stands out.

Just make sure the budget proves the point. If you are currently paying $1,000 a month rent and are applying for a mortgage that will have a $1,500 payment, the budget should show at least $500 a month in savings. Everything must make sense.

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