Finding the Right After-Bankruptcy Mortgage

 A bankruptcy is like an illness, an injury, or even an addiction. The problem itself is not nearly as important as the fact that you recover from it. While many of the aftereffects of a bankruptcy can cause you credit headaches and problems for seven to 10 years, you can still qualify for a mortgage. In fact, you might be able to get an "A-paper" mortgage (one that requires very good credit) at the going interest rate in as little as two years, as long as you can convince a lender that you have recovered. Even if you haven`t shown complete recovery from the bankruptcy, you can still get a loan, but it will be at a higher -- maybe much, much higher -- rate than the going "A-paper" rate.

While lawyers can go on forever about the subtle and not-so-subtle differences in various types of bankruptcies covered in chapters 7, 11 and 13 of the United States Bankruptcy Code -- which is why we refer to bankruptcies as chapters 7, 11 or 13 -- mortgage lenders are a lot more interested in your recovery. In other words, what you did after the bankruptcy is somewhat more important than what caused it.

The type of bankruptcy really isn`t that important to mortgage lenders, explains Doug Perry, first vice president of the consumer markets division of Countrywide Home Loans, in Calabasas, California. The reason for the bankruptcy, however, cannot be ignored, he adds. While important, it is not as important as your life after bankruptcy. A lender will want to know about the cause, but he will be especially interested in whether it could happen again.

Was this a once-in-a-lifetime event? That`s the key question. Perry asks, "Was this caused by a one-time occurrence, such as a major health problem, a divorce, a death in the family, or a loss of employment, or was it the result of a person letting financial obligations exceed income?" -- just plain spending too much, too often, and for way too long.

If the bankruptcy resulted from a once-in-a-lifetime event, save the paperwork that describes exactly what went wrong; the medical bills, the divorce decree, the death certificate, or the layoff notice. "Hang on to the paperwork," Perry says. "It can make a difference." You should also keep the actual paperwork from the lawyers and the courts so you can show the lender when the bankruptcy was formally discharged. This is also important. Your credit report will show the bankruptcy. What you have to be able to do is show the lender why it happened and why it won`t happen again. You also need to check your credit report for accuracy, as it might show the bankruptcy incorrectly, or have other mistakes.

"I`ve had situations," Perry recalls, "where the bankruptcy was five or six years ago, but something came up on the credit report" and the bankruptcy papers were necessary to prove that the credit report was wrong. The credit reporting "process is not always perfect. So, hang on to that paperwork for at least seven years," until you know that the bankruptcy has been wiped off your credit report. As important as the paperwork and the reason for the bankruptcy are, the way you have lived and spent after the bankruptcy will get even closer scrutiny. You will have to prove that you can handle credit responsibly.

"You must take on some other sort of loan, an installment loan, more than just a credit card," Perry says, "and show that you are paying it back‹a car, appliances, or furniture." Some lenders will want to see a loan that has been completely paid off. A big mistake that many people make after a bankruptcy is swearing off credit entirely. They pay cash for everything. While that may keep them out of debt, it doesn`t do anything for their credit rating. In order to have good credit, you have to show that you use credit, and make your payments on time. Perry points out that the "stigma" that was once attached to bankruptcy is disappearing. "These things happen a lot," he adds. "Lenders realize that bad things do happen to good people," but until you reestablish your credit rating, expensive loans also happen.

Perry says that it is conceivable that people who have just gone through bankruptcy could get a mortgage "if they had enough equity and a large down payment. However, they could also expect to pay fees that are triple the regular fees" and wind up with a loan "that is five to six points higher." Depending on where they went for the loan, "They could also have to deal with prepayment penalties if they tried to pay the loan back early, such as when their credit rating would qualify them for a better one." This is one of the many reasons to understand exactly what you are getting into when you sign the mortgage papers.

Many lenders have credit "comeback loans" for people who have recently had a bankruptcy, or for those who haven`t completely recovered from one. Countrywide, for example, has its own subprime division, Full Spectrum Lending, which deals with people with poor credit ratings. They have special programs that let you refinance in two years.

Perry says that if you are unsure of your credit worthiness, and what sort of mortgage rate you could get "you can call up a lender and get pre-qualified in advance and have your individual situation analyzed at no cost." Most major lenders will review your situation and let you know what options exist. You can get that loan, and if you`re willing and able to clean up your credit history, you can get one at a good interest rate. So as miserable and debilitating as the bankruptcy might have been, there is still joy in recovery.